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UNITED STATES OF AMERICA. 



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PRATTS' 



Manual of Banking Law: 



A TREATISE 



ON THE 



LAW APPLICABLE TO THE EVERY -DAY 
BUSINESS OF BANKS. 



DESIGNED AS 



A CLEAR AND ACCURATE STATEMENT, IN A SMALL 
COMPASS, OF THE GENERAL PRINCIPLES OF 
BANKING LAW AND THE DUTIES, POWERS, 
. AND LIABILITIES OF BANK OFFICERS. 



MAY 16 181 r- 



PREPARED FOR AND PUBLISHED BY 

A. S. PRATT & SONS, 
// 

National Bank Agents, 
washington/ d. c. 

I 
1888. 



w& 






Entered according to act of Congress, in the year 1888, by 

A. S. PRATT & SONS, 

In the office of the librarian of Congress at Washington, D. C. 



PRESS OF 

McQueen & Wallace, Printers, 
1108-1116 e street, 

WASHINGTON, D. C. 



PREFACE. 



In presenting this epitome of banking law to the pub- 
lic, we would state that the publication of such a work 
has been on our minds for several years on account of 
the demand, we having been repeatedly asked by cor- 
respondents if such a treatise were extant. 

The purpose of the book is simply to give bankers 
and persons having dealings with banks sufficient infor- 
mation concerning the law relating to banking to enable 
them to act intelligently on questions arising in the daily 
routine of business. 

It is needless to say that a book of this kind could be 
written only by a professional lawyer, thoroughly ac- 
quainted with legal principles and technicalities. We 
have been fortunate in securing for the preparation of 
this work the services of a lawyer specially versed in 
banking law, and we are confident it will be found that 
his statements of that law are both clear and accurate. 



CONTENTS. 

Part I. 

THE BANKING BUSINESS. 

Page. 

CHAPTER I. 
The Different Kinds of Deposits I 

CHAPTER II. 
To What Officer Should Be Paid In 5 

CHAPTER III. 
Deposits of Checks, Notes, and Bills 7 

CHAPTER IV. 
Deposits for Special Purpose 12 

CHAPTER V. 

Deposits in Which Third Persons Have Equities . 17 

CHAPTER VI. 
Deposits for Safe-Keeping 21 

CHAPTER VII. 
Deposits When Bank Is Insolvent 30 

CHAPTER VIII. 
Payment of Deposits . 32 



vi CONTENTS. 

Page. 

CHAPTER IX. 
Payment of Customer's Notes and Acceptances . . 44 

CHAPTER X. 
Payment upon Forged and Altered Orders .... 51 

CHAPTER XI. 
Certification of Checks 65 

CHAPTER XII. 
The Bank-Book or Pass-Book 80 

CHAPTER XIII. 
The Clearing-House 85 

CHAPTER XIV. 
Collections 93 

CHAPTER XV. 
The Banker's Lien 117 

F^RT II. 

BANK OFFICERS. 

CHAPTER I. 
Directors 131 

CHAPTER II. 
The Cashier 147 

CHAPTER III. 
Bonds of Officers 161 



MANUAL OF BANKING LAW. 

PART I. 

THE BANKING BUSINESS. 
CHAPTER I. 



THE DIFFERENT KINDS OF DEPOSITS. 

Deposits made with banks are of two sorts, usually 
known as general deposits and special deposits. These 
differ very materially in their legal effects, and in the 
relationship which they, respectively, establish between 
the bank and the customer. When the expression 
1 ' deposit with a bank ' ' is used without any qualifying 
terms, it is commonly understood that a general de- 
posit is meant ; deposits of this kind being the rule and 
those of the other kind the exception. 

General Deposits. — Where one has made a general 
deposit, what he has with the bank is not, in fact, 
money (although it is customary to speak of it as such), 
but merely a credit. For when money is left with the 
bank in the ordinary way, without any special agree- 
ment, the title to it passes to the bank absolutely, and 
what the customer gets in return for it is a credit with 
the bank for the amount so deposited, with or without 
interest, as the case may be. The relation between the 
bank and the depositor, then, is the ordinary relation of 



2 PRATTS' MANUAL OF BANKING LAW. 

debtor and creditor. 1 In substance, the deposit is a 
loan by the latter to the former. If the money should 
be stolen immediately after the deposit is complete, the 
loss would fall upon the bank, and it could not relieve 
itself from liability to the customer by showing that 
there was no neglect on its part, as it might if the title 
to the money had not passed to it, for the money stolen 
was its own. On the other hand, should the bank fail, 
the customer, even though he might be able to identify 
the money or the bill or note, could not claim the de- 
posit as his ; he could come in only on a footing with 
other creditors. 2 Then, too, the bank being merely a 
debtor may discharge its indebtedness to the depositor 
in any currency that is legal tender, although the de- 
posit was made in gold, unless there was a special 
agreement to repay in like currency ; 3 and, conversely, 
the bank must pay currency that is legal tender, 
although the deposit was made in a currency that has 
since depreciated. 4 

And not only is this the relation which exists between 
a bank and an ordinary depositor, but generally it is the 
relation existing between banks which are correspond- 
ents of each other. Thus, where one bank makes col- 
lections for another, and the avails of the collections are 
placed by the collecting bank with its own funds, and 



1 Foley v. Hill, 2 H. L. Cases, 28 ; Marine Bank v. Fulton Bank, 
2 Wall., 252 ; Bank of Republic v. Millard, 10 Wall., 152 ; Phoenix 
Bank v. Risly, in U. S., 125; Commercial Bank v. Hughes, 17 
Wend., 94; Bank of Northern Liberties v. Jones, 42 Penn. St., 

536. 

2 People v. City Bank of Rochester, 93 N. Y., 582. 
3 Thompson v. Riggs, 5 Wall., 663. 

4 Marine Bank z>. Chandler, 27 111., '525, 



THE DIFFERENT KINDS OF DEPOSITS. 3 

credited on account to the transmitting bank (as is the 
usual custom), the relation between them will be simply 
that of debtor and creditor. 1 

Special Deposits. — In the case of a special deposit 
the bank becomes a bailee or trustee of the funds de- 
posited, according to the circumstances, but never 
owner. The property in the funds remains in the de- 
positor, and the bank merely takes care of them for him, 
or makes such disposition of them as he directs. Its 
power over them is not absolute, as in the case of a 
general deposit, but is limited to the purposes for which 
the deposit was made. If they are lost, the loss must 
fall upon the depositor, there being no negligence on the 
part of the bank ; and, on the other hand, should the 
bank fail, they would not go into the general fund for 
the creditors, but could be recovered specifically by the 
depositor. 2 

Special deposits are frequently spoken of as though 
they comprised only deposits for safe-keeping ; but this 
is not accurate. Any deposit made with a bank where 
it is the intention of the parties that the property in the 
money or other thing deposited shall not pass to the 
bank, and that the ordinary relation of bank and depos- 
itor shall not be established, is, in the proper sense, a 
special deposit. 3 



1 Marine Bank v. Fulton Bank, 2 Wall., 252. 

2 Marine Bank v. Fulton Bank, 2 Wall., 252 ; Dawson v. Real 
Estate Bank, 5 Ark., 283 ; People v. City Bank of Rochester, 93 
N. Y., 582 ; St. Louis v. Johnson, 5 Dillon, 268. 

3 For illustrations of this see People v. City Bank of Rochester, 
93 N. Y., 583 ; St. Louis v. Johnson, 5 Dillon, 268 ; Nat'l Bank 
of Fishkill v. Speight, 47 N. Y, 668. 



4 PRATTS' MANUAL OF BANKING LAW. 

In What Cases Deposit is General and in What 
Cases Special. — Such being the different effects of a 
general and a special deposit, it often becomes a ques- 
tion of great importance to which class a certain deposit 
belongs. It has been stated as a general rule "that 
where money, not in a sealed packet, or closed box* bag, 
or chest, is deposited with a bank or banking corpora- 
tion, the law presumes it to be a general deposit, until 
the contrary appears ; because such deposit is esteemed 
the most advantageous to the depositary, and most con- 
sistent with the general objects, usages, and course of 
business to such companies or corporations. But if the 
deposit is sealed or locked up, or otherwise covered or 
secured in a package, cash box, bag, or chest, or anything 
of the like kind, of or belonging to the depositor, the 
law regards it as a pure or special deposit, and the deposit 
thereof only for safe-keeping and accommodation of the 
depositor. ' ' x 

While this rule is doubtless correct in the main, it is 
certainly not of universal application ; for we know that 
banks every day receive sealed packages and bags of 
money which they treat as general deposits ; and, on 
the other hand, they receive loose money which is 
treated as a special deposit. Nor is it conceived that 
any general rule can be formulated which would afford 
a test in all cases. The question is one which must be 
decided upon the facts of the particular case in which 
it arises. 

Dawson v. Real Estate Bank, 5 Ark., 283. 



TO WHAT OFFICER SHOULD BF, PAID IN. 



CHAPTER II. 



TO WHAT OFFICER SHOUED BE PAID IN. 

In receiving deposits a bank must, of course, act 
through its agents. But not every officer or agent of 
the bank is authorized to receive deposits. And a de- 
posit made with a person who is not an agent of the 
bank for this purpose will fasten no liability upon the 
bank, unless the customer can show that the money 
actually came into the bank's possession. By deliver- 
ing his funds to an officer or employe who is not author- 
ized to receive them for the bank, the customer makes 
that person his own agent for the purpose of delivering 
the funds to the bank ; and, therefore, if such person 
should lose or misappropriate such funds, the loss would 
fall, not upouthe bank, but upon the customer. 1 

In large banks there is usually an officer, called the 
receiving teller, who has his place at the counter and 
whose special duty it is to receive deposits. And where 
a bank has a receiving teller, the paying teller, the 
book-keeper, or the clerks have usually no authority to 
receive deposits, except in special instances or on 
special occasions. Hence payments should always be 
made to the receiving teller, if practicable. 

But in the matter of receiving deposits, as in other 
matters, the bank will be bound by the acts of one 
whom it has clothed with an apparent authority to act 
for it. And, therefore, where payment is made to a 

1 Manhattan Company v. Lydig, 4 Johns. , 377 ; Thatcher v. 
Bank of State of New York, 5 Sandf., 121. 



6 PRATTS' MANUAL Otf BANKING LAW. 

person who, with the knowledge of the managing offi- 
cers, is permitted to take money from customers, the 
bank cannot be heard to deny that such person was 
authorized to receive the deposit. 1 Thus, where a pack- 
age of bills, addressed to the cashier, was delivered to 
an employe who had been placed behind the counter 
and allowed to act as an assistant to the receiving 
teller, the bank was held to be bound by the receipt. 2 

As the cashier is the principal financial officer of the 
bank, whose duty it is to take charge of all the money 
and funds of the bank, it is conceived that a deposit 
made with him will be considered to have been made 
with the bank, unless his power in this respect has been 
limited, and this fact is known to the customer. 3 And 
upon principle it would seem that the fact that the bank 
has a receiving teller would not operate as a limitation 
upon the authority of the cashier to receive deposits, 
for the teller is but a subordinate of the cashier, and, as 
has been said by the Supreme Court of the United 
States, is, as it were, but the arm by which the cashier 
performs a part of his functions. 4 

Deposits should not be tendered to officers of the 
bank outside of the banking-house, unless it is known 
that they have authority so to receive them. Ordinarily 
they have no such authority. 

1 Hotchkiss v. Artisans' Bank, 42 Barb., 517; East River Bank 
v. Gove, 57 N. Y., 597. 
2 Hotchkiss v. Artisans' Bank, supra. 
'Merchants' Bank V. State Bank, 10 Wall., 604. 
"Id. 



DEPOSITS OF CHECKS, NOTES, AND BIIXS. 



CHAPTER III. 



DEPOSITS OK CHECKS, NOTES, AND BIELS. 

Where a check, note, bill, or other security deposited 
with or transmitted to a bank is, with the knowledge 
and consent of the customer, received and credited as 
so much money, the property in the instrument passes 
to the bank, and the bank becomes the debtor to the cus- 
tomer in the amount so credited. The transaction, in 
its effect, is equivalent to the discount or payment of the 
instrument by the bank, the deposit of the proceeds by 
the customer, and a credit for the amount in his bank 
account. The instrument is then at the risk of the 
bank, and the only recourse the bank has against the 
depositor is that which may be secured by means of the 
indorsement, and charging him in the usual way as an 
indorser ; and the depositor, on the other hand, is pre- 
cluded from referring to the instrument specifically, and 
has only a claim for the debt due him from the bank. 1 

"When Deposits 'Will be Considered as Cash. — 

An express agreement that the bank shall receive the 
instrument as mone}^ or cash is not necessary ; an agree- 
ment to this effect may be inferred from the action of 
the parties, or from the course of dealing between them. 2 

1 Nat'l Bank v. Burkhardt, ioo U. S., 686; Metropolitan Nat'l 
Bank v. Loyd, 90 N. Y., 530; S C, 25 Hun., 101 ; Oddie v. Nat'l 
City Bank, 45 N. Y., 735 ; Clark v. Merchants' Bank, 2 N. Y., 380 ; 
Levy v. Bank of the United States, 1 Binney, 37 ; Peterson v. The 
Union Nat'l Bank, 52 Penn. St., 206. 

2 Metropolitan Nat'l Bank v. L,oyd, supra; Clark v. Merchants' 
Bank, supra; St. L. andS. F. R. R. Co. v. Johnston, 23 Blatch., 489. 



8 PRATTS' MANUAL OF BANKING LAW. 

But when the relation of debtor and creditor in such 
case is sought to be established from the action of the 
parties, or the course of their dealings, the facts must 
be clear and unequivocal, else the inference will be 
rather that the bank received the instrument as an agent 
for collection merely. 1 If it has been the uniform prac- 
tice of the bank to credit checks, &c. , deposited by the 
customer as if they were money, it may be inferred 
from that practice that a particular instrument of that 
kind was so deposited and received. 2 But if there is 
nothing more than the fact that they were received by 
the bank, and a credit for them entered in the pass-book 
of the customer, the presumption will be (except in the 
cases to be mentioned hereafter) that they were received 
merely for collection. 3 And where the paper is indorsed 
to the bank " for collection," the presumption is that 
the customer did not intend that the property in it 
should pass to the bank, although it may have been the 
intention that after the collection was made the pro- 
ceeds should go into the general funds of the bank, and 
the holder become simply a creditor for the amount.* 

Where the Instrument is a Check on the Same 
Bank. — As we have seen above, when the instrument 
is other than a check drawn upon the bank itself, the 
inference is rather that it was deposited for collection ; 

^ilsby v. Williams, 5 Barnewall & Alderson, 816; Boyd v. 
Emerson, 2 Adolphus & Ellis, 184; Scott v. Ocean Bank, 23 
N. Y., 289; Natl Gold Bank v. McDonald, 51 Cal., 64. 

2 See cases cited in note preceding. 

3 Nat'l Gold Bank v. McDonald, supra. Commercial Bank v. 
Miller, 77 Ala., 168. 

4 First Nat'l Bank of Crown Point V. First Nat'l Bank of Rich- 
mond, 76 Ind., 561. 



DEPOSITS OE CHECKS, NOTES, AND BILDS. 9 

but in the case of a check drawn on the same bank the 
inference, according to a court of very high authority, 
viz., the Court of Appeals of New York, is the other 
way ; and the fact that such a check was delivered to 
the bank for deposit, and was entered by the proper 
officer on the pass-book or deposit ticket of the customer, 
will be sufficient to sustain the presumption that it was 
received as a deposit of money. 1 The ground for this 
would seem to be that when a check drawn directly 
upon the bank itself is presented for deposit the effect 
is the same as though payment in any other form was 
demanded; and while the bank has the right to reject 
the check, or to receive it conditionally, yet if neither 
of these things is done, but a credit is given for it, the 
bank in effect pays it, which closes the transaction 
between the parties. 2 But in a case in the Supreme 
Court of California this view of the New York court 
was dissented from, and it was there held that the bank 
in such case receives a check upon itself as it receives 
checks upon other banks, presumably to collect the 
amount for the customer and place it to his credit ; and 
the court said that the rule it intended to lay down is 
' ' that when a check on the same bank is presented by 
a depositor with his pass-book to the receiving teller, 
who merely receives the check and notes it in the pass- 
book, nothing more being said or done, this does not 
of itself raise a presumption that the check was received 
as cash, or otherwise than for collection." 3 

After a check has been deposited and received as 



x Oddie v. The Nat'l City Bank, 45 N. Y., 735. 

''Id. 

3 Nat'l Gold Bank z/.. McDonald, 51 Cal., 64. 



IO PRATTS' MANUAL OP BANKING LAW. 

money the bank could not, of course, return it to the 
depositor and cancel the credit, upon discovering that 
the drawer had no funds in the bank to meet it. But 
if the depositor knows that the drawer has no funds in 
the bank, he can retain no credit given for the check ; 
for in presenting such a check he is deemed to partici- 
pate in a fraud, from which the law will not permit him 
to derive any benefit. 1 

Drafts or checks held by banks drawn in their own 
favor are prima facie presumed to have been received 
on deposit as cash from their customers, and not to 
have been deposited for collection merely. 2 

Where the Instrument is Not Genuine. — As a 
general rule, where an instrument is received as money, 
and it afterwards proves to be a forgery, the bank may 
(except where the instrument is drawn on the bank 
itself) cancel the credit given for it; or, if the cus- 
tomer has drawn out the money, may recover the 
amount from him as money paid under a mistake of 
fact. 3 But in the case of a check drawn upon itself, 
the bank is precluded from canceling the credit or 
recovering the money, and the depositor, if he was 
ignorant of the forgery, is entitled to the amount ; for, 
like any other drawee, the bank is presumed to know 
the signature of the drawer, and, having accepted the 
check as genuine, cannot afterwards dispute its validity 
as against the depositor. 4 

1 Peterson v. The Union Nat'l Bank, 52 Penn. St., 206. 

2 Gettysburg Nat'l Bank v. Kuhns, 62 Penn. St., 88. 

3 Allen v. Fourth Nat'l Bank, 37 New York Superior Court, 137. 

4 Levy v. Bank of the United States, supra; Allen v. Fourth 
Nat'l Bank, supra. For discussion of the subject of the payment 
of forged instruments see chapter on that subject. 



DEPOSITS OF CHECKS, NOTES, AND B1U,S. II 

Custom to Credit Conditionally. — In the larger 
cities, and probably in many smaller places, a custom or 
usage prevails among the banks, to give merely a con- 
ditional credit for checks which are drawn on other 
banks, which credit is to become absolute after a fixed 
time, but in the meantime may be canceled, if the 
checks prove not to be good. 1 Where checks are de- 
posited with reference to such a custom or usage, there 
can be no question as to the right of the bank to cancel 
the credit given for them, when they are returned 
within the prescribed limit of time. 2 But even where 

1 Allen v. Fourth Nat'l Bank, 37 N. Y. Superior Court, 137. 
See also Nat'l Bank v. Burkhardt, 100 U. S., 686 ; Nat'l Gold 
Bank v. McDonald, 51 Cal., 64. 

The banks which are members of the Philadelphia Clearing- 
House have the following notice printed upon the first page of 
the pass-books which they give to their customers : "In con- 
formity with the rules adopted by all the banks of this city, 
members of the Clearing-House Association, you are hereby noti- 
fied that you are held responsible as indorser for the non-payment 
of all checks upon other banks of this city, members of said 
association, deposited by you as cash in this bank, until the close 
of the business day next succeeding that on which such checks 
are deposited, this bank receiving such checks only for col- 
lection on your account through the exchange at the Clearing- 
House. Upon all other checks and drafts deposited by you as 
cash, your responsibility as endorser continues until payment has 
been ascertained by this bank." Merchants' Nat'l Bank v. 
Goodman, 109 Penn. St., 422. 

Bankers in London, upon the receipt of undue bills from a 
customer, do not carry the amount directly to his credit, but 
enter them short, as it is called ; that is, note down the receipt 
of the bills in his account, with the amount and the times when 
due, in an inner column of the same page, which sums when 
received are carried forward into the usual cash column. Giles , 
v. Perkins, 9 East, 12. 

2 Allen v. Fourth Nat'l Bank, supra. 



12 PRATTS* MANUAL OF BANKING LAW. 

such a custom prevails, the checks may, of course, be 
deposited and received as money; and whether they 
were so deposited and received in any given case is a 
question of fact to be determined from the particular 
circumstances. 1 



CHAPTER IV. 



DEPOSITS FOR SPECIAL PURPOSE. 

It frequently happens that deposits are made with 
a bank for some special purpose, as, for instance, to 
pay a certain check, or a certain note or other particular 
indebtedness ; and when such a deposit is received by 
the bank, knowing the purpose for which it is made, 
the deposit is, in legal phraseology, impressed with a 
trust, and the bank is bound to use it for that purpose ; 
and if any other disposition is made of the fund, with- 
out the assent of the depositor, the bank will be liable 
for the amount. 2 Thus, if A deposits money to B's 
account, with directions to appropriate it to the payment 
of a certain check which has been drawn by B, the bank 
cannot carry the amount to B's account generally. 3 So, 
if a bank agree with a depositor that it will apply all 
sums deposited by him to the payment of certain checks 
exclusively, it cannot apply any part of such deposit to 



Second Nat'l Bank v. Burkhardt, ioo U. S., 686. 

2 People v. The City Bank of Rochester, 96 N. Y., 582 ; Parker 
v. Hartley, 91 Penn. St., 465 ; Wilson v, Dawson, 52 Ind., 513 ; 
Judy v. Farmers' and Traders' Bank, 81 Mo., 464 ; Straus v. 
Tradesmen's Nat'l Bank, 36 Hun., 451. 

3 Straus v. Tradesmen's Nat'l Bank, supra. 



DEPOSITS FOR SPECIAL PURPOSE. 1 3 

the payment of the depositor's note of which it is the 
holder. 1 

The case of Parker v. Hartley affords a good illustra- 
tion of this principle. 2 A, who had sold oil to be deliv- 
ered in the future, requested H to furnish the amount 
of the margin which, according to the custom of oil 
dealers in that locality, A was required to deposit in 
bank to secure the performance of the contract of sale 
on his part. H, who was a depositor in the bank, drew 
his checks for the necessary amount to the order of the 
cashier, and inserted a memorandum in each check that 
it was for a margin, specifying the particular contract ; 
and these checks were deposited with the cashier, to- 
gether with A' s counterparts of the agreements between 
him and the purchasers. Before their expiration the 
contracts were settled between A and the buyers ; but 
to effect this a considerable part of the margin on one 
contract was required to be used by A. The residue of 
the entire amount was then paid to A by the bank. 
Some time afterwards A became insolvent. H then 
brought suit against the bank for the amount so paid 
to A, and it was held that he could recover ; for as 
he had placed the funds at the disposal of the bank for 
a special purpose, viz. , the payment of such sum or sums 
as A might become liable to pay in event of his failure 
to comply with the terms of the contracts, the bank had 
no right to appropriate those funds in any other way. 

Depositor may Revoke Directions. — Where a de- 
positor has made a deposit on his own account with 
directions to apply it to a specific purpose, such direction 

1 Wilson v. Dawson, 52 Ind., 513. 

2 91 Penn. St., 465. 



14 PRATTS' MANUAL OF BANKING LAW. 

is regarded as merely an executory order, and, therefore, 
revocable by him, until the bank, in the pursuance of 
his directions, has appropriated the money to the pur- 
pose designated, so as to be precluded from making any 
other disposition of it. 1 Therefore, if a customer deposits 
money to his own account to pay a certain check or 
note, or a particular creditor, and before the bank makes 
such application of the money he draws his check for the 
amount, the bank cannot refuse to honor the check, and 
it cannot be made liable to a third person for allowing 
the money to be so drawn out. 2 A good illustration of 
this principle is afforded by a recent case in Pennsyl- 
vania. 3 Higbee & Co. brought suit against the First 
National Bank of Scranton to recover $600 deposited 
with it by one Gillespie, in his own name, to pay a draft 
drawn upon him by the plaintiffs ; which amount the 
bank had shortly afterwards paid out on Gillespie' s check, 
the draft not then being with the bank. The plaintiffs 
secured a judgment for the amount in the court below, 
but the Supreme Court reversed this judgment, and 
held that the plaintiffs had no cause of action against 
the bank. In the course of his opinion, Paxson, J., 
said : ' ' The money had not been applied to the draft 
when Gillespie's check was presented, and could not 
have been, as the draft was not there. Had the bank 
failed between the date when the money was deposited 
and when it was drawn out upon Gillespie's check, the 
loss would have fallen on him, not on Higbee & Co. 

1 Williams v. Everett, 14 Bast, 582 ; JStna Nat'l Bank v. Fourth 
Nat'l Bank, 46 N. Y., 82 ; Bank v. Higbee, 109 Penn. St., 130; 
Mayor v. Chattahoochee Nat'l Bank, 51 Ga., 325. 

2 See cases cited in preceding note. 

3 Bank v. Higbee, supra. 



DEPOSITS FOR SPECIAL PURPOSE. 1 5 

The latter had no interest in the money until its appli- 
cation to their draft. An order or direction on the part 
of Gillespie to so apply it was in its nature revocable up 
to the moment of its application. Had it been so 
applied, the power of revocation would have ceased to 
exist. ' ' 

Consideration for Agreement of Bank. — The con- 
sideration for the agreement by the bank to make a 
special application of the funds deposited is the deposit 
itself. 1 

Bank Has no General Lien in Such Case. — As 

we shall see hereafter, funds deposited for a special pur- 
pose known to the bank cannot be withheld from that 
purpose in order that they may be applied to an indebt- 
edness of the customer to the bank. 2 

Bank as Stakeholder. — A bank not unfrequently 
receives a deposit in the capacity of stakeholder. The 
most common instances of this are deposits made by 
way of margins to insure the performance of contracts. 3 
In such cases the agreement is that neither part}^ shall 
withdraw any part of the deposit without the assent of 
the other, until the contract between them is fulfilled, 
or default is made ; and the bank is, of course, bound 
to hold the deposit subject to the terms of this agree- 
ment. 

There would seem to be no objection to a bank re- 
ceiving a deposit of this kind. 4 In the case of Bushnell 

1 Wilson v. Dawson, 52 Ind., 513. 

2 See chapter on Banker's I/ien. 

3 See Parker v. Hartley, 91 Penn. St., 465 ; Bushnell v. Chatau- 
qua County Nat'l Bank, 74 N. Y., 290 ; S. C, 10 Hun., 378. 
i Bushnell v. Chatauqua County Nat'l Bank, supra. 



1 6 PRATTS' MANUAL OF BANKING LAW. 

v. The Chatauqua National Bank, Rappallo, J., said: 
' ' We are not aware of any such limitation upon the 
power of banks authorized to receive deposits as would 
deprive them of the power to receive the deposit of a 
fund in controversy, to abide the event of a litigation 
or award, or to become payable upon a contingency to 
some person other than the depositor. So long as the 
bank undertakes nothing more than to pay over money 
deposited with it to the person who may, according to 
the conditions upon which the deposit was made, be- 
come entitled to receive it, we think it does not tran- 
scend its power. Nor can it make any difference that 
the portion of the money deposited which may become 
payable to a third person is at the time of the deposit 
uncertain and subject to liquidation." 

But even if it were beyond the power of the bank to 
receive such a deposit, the bank could not set up that 
fact as a defense in an action brought to recover the 
amount by the party to whom, according to the terms 
of the contract, it became forfeited. 1 

If the amount payable to either party out of such a 
deposit is uncertain or subject to liquidation, the bank 
may hold the fund until such amount is ascertained, 
and the bank is entitled before payment to have the 
amount liquidated in such a manner as to bind all 
parties. 2 If this liquidation is not made by agreement 
between the parties entitled to the fund, it must neces- 
sarily be made by a competent tribunal whose decision 
will be binding. 3 The cost of such a proceeding should 



x io Hun., 378. 

2 Bushnell v. Chatauqua County Nat'l Bank, 74 N. Y., 290. 

z Id. 



EQUITIES OF THIRD PERSONS. 1 7 

be paid out of the fund. The bank itself, being a mere 
depositary, would be protected against any costs not 
unnecessarily and unreasonably occasioned by it. 1 



CHAPTER V. 



DEPOSITS IN WHICH THIRD PERSONS HAVE 

EQUITIES. 

A very considerable portion of the deposits with 
banks is made up of funds in which third persons have 
a beneficial interest, as, for instance, money deposited 
by trustees, executors, agents, officers, and other per- 
sons occupying fiduciary positions. And where third 
persons have a beneficial interest in the money or se- 
curities deposited, the deposit will be impressed with a 
trust in their favor, whether it was made in form for the 
trust account, or simply in the name of the depositor, 
and for his individual account. 2 On this point the L,ord 
Justice Knight Bruce, in his opinion in the important 
case of Pennell v. Deffell, said : ■ ' When a trustee pays 
trust money into a bank to his credit, the account being 
a simple account with himself, not marked or distin- 
guished in any other manner, the debt thus constituted 
from the bank to him is one which, as long as it remains 
due, belongs specifically to the trust as much and as 



1 Bushnell v. Chatauqua County Nat'l Bank, 74 N. Y., 290. 

2 Nat'l Bank v. Insurance Co., 104 U. S., 54; Van Alen v. 
American Nat'l Bank, 52 N. Y., 1 ; Farmers' and Mechanics' 
Nat'l Bank v. King, 57 Penn. St., 202 ; Pennell v. Deffell, 4 De 
G. M. & G., 374 ; In re Hallett's Estate, L. R. 13, Ch. Div., 696. 



1 8 PRATTS' MANUAL OF BANKING UW. 

effectually as the money so paid would have done, had 
it been specifically placed by the trustee in a particular 
repository and so remained." And this is the rule, not 
only where the deposit is made by a trustee, using that 
word in its more limited sense, but as well where the 
deposit is made by any person standing in a fiduciary 
relation to another. 1 Thus, if an agent sell the goods 
of his principal and deposit the proceeds in bank to his 
individual account, the credit given him by the bank 
for the amount will belong in equity to his principal. 3 
Nor will it defeat the right of the beneficial owner to 
claim the deposit that the fiduciary substituted other 
money for that of such owner ; 3 nor that at the same 
time he deposited the money of his cestui que trust he 
deposited money of his own. 4 It is not essential to the 
right of a beneficial owner that the bank should have 
had notice of the trust character of the funds, except to 
prevent the bank from paying out the amount, or ac- 
quiring some right thereto upon the faith that the funds 
were the individual property of the depositor. 5 

Beneficial Owner can Recover from the Bank. — 
Where the equitable owner can establish his title to the 
money, he can recover it of the bank, and the bank can- 
not set up that there was no privity between it and 
such owner, for the question is one of title only. The 
obligations of the bank in this respect are not different 

1 Pennell v. Deffell, 4 De G. M. & G., 374 ; In re Hallett' Estate, 
Iv. R. 13, Ch. Div., 696. 

2 Van Alen v. American Nat'l Bank, 52 N. Y., 1. 
3 VanAlen v. American Nat'l Bank, supra; In re Hallett's 

Bstate, supra. 

* See cases cited in preceding note. 

5 Van Alen v. American Nat'l Bank, supra. 



EQUITIES OF THIRD PERSONS. 1 9 

from those of a private person, and trie real owner would 
have the same right to recover the money from the bank 
that he would have to recover other property of his in 
the hands of a third person. 1 

Notice Necessary to Charge the Bank. — While 
notice to the bank is not necessary in order to protect 
the rights of the equitable owner when the bank is in- 
different between the parties, yet if the bank claims any 
right of its own in respect to the deposit, or is sought to 
be charged with having made a wrongful payment of 
the amount, it must be shown to have had notice of the 
rights of the cestui que trust. 11 Therefore, if a trustee 
deposits the trust funds in his own name, and the bank 
acquires a lien thereon upon the faith that the money 
belonged to the trustee individually, this lien cannot 
afterwards be defeated by notice that the deposit con- 
sisted of trust funds. 3 And if the bank, having no 
notice of the interest of the beneficiary, pays out the 
money to one who has apparently the right to receive 
it, the bank will be protected. 4 In all cases where the 
bank cannot be charged with notice the rule is, that it 
is only to the extent of the interest remaining in the 
depositor that the money can be followed as against the 
bank having a lawful claim thereto founded upon a 
consideration. 5 And although the bank may have 

1 Van Alen v. American Nat'l Bank, 52 N. Y., 1. 

2 Nat'l Bank v. Insurance Co., 104 U. S., 54; Justh v. Nat'l 
Bank of Commonwealth, 56 N. Y., 478; Viets v. Union Nat'l 
Bank of Troy, 101 N. Y., 564; School District v. First Nat'l 
Bank, 102 Mass., 174. 

3 School District v. First Nat'l Bank, supra. 

4 Viets v. Union Nat'l Bank of Troy, 101 N Y., 564. 

5 Justh v. Nat'l Bank of the Commonwealth, 56 N. Y., 478. 



20 PRATTS' MANUAL OF BANKING LAW. 

notice of the interest of the cestui que trust, yet if by 
his subsequent acts he clothes the depositor with an 
apparent ownership or control of the money, the bank 
will not be liable if it pays the money to the depositor. 1 

What will be Considered as Notice to the 
Bank. — In general, any circumstance that conveys a 
clear intimation that the funds are trust funds will be 
sufficient to charge the bank with knowledge of that 
fact. In a case where a county officer, who had for a 
long time kept with his bankers but one account, into 
which he paid indiscriminately both his own and the 
county moneys, opened with the same bankers a sepa- 
rate account, headed ' ' Police account, ' ' it was said by 
Sir W. M. James, L,ord Justice, that the opening of this 
account under such a heading ' ' was as clear and dis- 
tinct a statement that the moneys paid into it (the 
account) were moneys belonging to the county as if he 
had put the county moneys into a strong box labelled 
' County moneys.' " 2 So, where an executor left with 
a bank for collection a draft drawn in his favor as 
executor, and afterwards deposited the proceeds to an 
account which, by his direction, was opened in his own 
name, with the addition of the word ' ' Executor, ' ' it 
was held that the bank received the money from the 
depositor in his fiduciary capacity, and that, having paid 
the amount to a receiver of the executor's individual 
property, it was liable for the amount to him in his 
capacity as executor. 3 And where a husband made a 

x Dewar v. Bank of Montreal, 115 111., 22. 

2 Ex pane Kingston, L. R., 6 Ch. App., 632. 

3 Scrantom v. Farmers' and Mechanics' Bank, 24 N. Y., 424. 
But see dissenting opinion of Denio, J., in this case. See also 
Swartwout v. Mechanics' Bank, 5 Denio, 555. 



DEPOSITS FOR SAFE-KFKPINO. 2 2 

deposit of a check drawn to his wife's order, and 
requested that the deposit be put in her name and to 
her credit, and that a pass-book be issued in her name 
for delivery to her, it was held that his request, taken in 
connection with the fact that the checks had been 
drawn to her order, fairly disclosed his agency, and that 
the bank was chargeable with knowledge that the 
deposit belonged to the wife. 1 

But the mere fact that the title of the fiduciary is 
added to his name in the heading of the account will 
not be evidence that the moneys deposited to that ac- 
count are trust moneys, but such addition will be re- 
garded as nothing more than a description of the person. 2 
Accordingly, where an account was opened in the name 
of the depositor, with the addition of the word ' ' Col- 
lector," it was held that this addition afforded no 
presumption that the funds deposited to that account 
belonged to the United States. 3 And the same rule 
was applied where the account stood in the name of the 
depositor, with the addition "County Treasurer." * 



CHAPTER VI. 



DEPOSITS FOR SAFE-KEEPING. 

It is quite a common practice of banks to receive 
from their customers and other persons certain kinds 
of property for safe-keeping. As a rule, no charge is 

1 Bates v. First Nat'l Bank of Brooklyn, 89 N. Y., 286. 

2 Swartwout v. Mechanics' Bank, 5 Denio, 555 ; Eyerman v. 
Second Nat'l Bank, 84 Mo., 408; S. C, 13 Mo. App., 289. 

3 Swartwout v. Mechanics' Bank, supra. 
4 Byerman v. Second Nat'l Bank, supra. 



22 fcRATTS* MANUAL OI^ BANKING LAW. 

made for this service, and the only benefit which the 
bank derives from it is the obligation placed upon the 
depositor. Deposits of this character are much more 
common in England than in America. In the former 
country bankers receive in this way, not only securities 
and money, but plate, jewels, title-deeds, and impor- 
tant papers, and other valuables of small bulk. But 
in this country deposits of this sort are usually limited 
to money, bullion, and paper securities of one kind and 
another. And although it is a part of the business of 
banks to receive them, they should be restricted to the 
kind of property which bankers are in the habit of re- 
ceiving as depositaries. To adopt the vigorous terms 
employed by the Supreme Court of Pennsylvania, banks 
are not to be turned into pawnbrokers' shops, or receive 
old clothes on deposit. 1 

Special Deposits Incidental to Banking Busi- 
ness. — The receiving of special deposits for safe-keep- 
ing is incidental to the business of banking. Special 
deposits of money, bullion, and plate were the principal, 
and in some cases .the only, deposits received by the 
early bankers of Europe. Some of our American courts 
and judges have denied that the receiving of such 
deposits is a part of a legitimate banking business, as 
that business is defined by custom and statute in this 
country ; 2 but these decisions and dicta have been over- 

1 Lloyd v. West Branch Bank, 15 Penn. St., 172. See also 
Pattison v. Syracuse Nat'l Bank, 80 N. Y., 82. 

2 Wiley v. Nat'l Bank of Vermont, 47 Vt., 389 ; Whitney v. First 
National Bank of Brattleboro, 50 Vt., 389 ; Third Nat'l Bank of 
Baltimore u. Boyd, 44 Md., 47 ; First Nat'l Bank v. Ocean Nat'l 
Bank, 60 N. Y., 278 ; Lloyd v. West Branch Bank, 15 Penn. St., 
172. 



DEPOSITS POP. SAFE-KEEPING. 23 

ruled by the highest authorities, and it may now be 
regarded as well settled that receiving deposits of this 
character is not outside the scope of American banking. 1 
Any bank, therefore, may receive such a deposit, unless 
there is some provision in its charter, or in the banking 
laws under which it is organized, that either expressly 
or impliedly forbids it to do so. That the national 
banks may act as such depositaries was settled by the 
Supreme Court of the United States in the case of 
National Bank v. Graham ; 2 and the power was 
sustained upon two grounds — first, that it is incidental 
to the banking business, and secondly, that it is implied 
in the provision of Section 5228 Revised Statutes, 
which authorizes an insolvent association to deliver 
special deposits. 

Authority of Officers to Receive Special De- 
posits. — Of course a bank is not bound to take special 
deposits, and it will not be liable for the loss of any 
such deposit received by any of its employes, unless the 
same was received or retained with the express or im- 
plied assent of the officers who have authority to bind 
the bank in such matters. The mere voluntary act of 
an officer in so receiving property would not subject the 
bank to liability ; 3 but an express authority from the 
directors is not necessary. If the bank is accustomed 
to take such deposits, and this is known to the directors, 



1 Nat'l Bank v. Graham, 100 U. S., 697; Pattison v. Syracuse 
Nat'lBank, 80 N. Y., 82. 

2 iooU. S., 697. 

3 First Nat'l Bank of Lyons v. Ocean Nat'l Bank, 60 N. Y., 278 ; 
Ivloyd v. West Branch Bank, 15 Penn. St., 172. 



24 fcRATTS* MANUAL OF BANKING I.AW. 

and is acquiesced in by them, the bank will be bound. 1 
And where the entire management and control of the 
affairs of the bank are left with one of its officers, then the 
receiving of a special deposit by him, or by any of his 
subordinates, with his authority, will be deemed binding 
upon the bank, as much so as if the directors had ex- 
pressly given their assent. 2 

The Degree of Care Required. — It is frequently 
said that the degree of care required of a bank in the 
keeping of a special deposit is the same as that required 
of any other gratuitous bailee. Now, while this is a 
correct statement of an abstract rule of law, it is likely 
to be misleading, unless coupled with the further state- 
ment that in all cases the degree of care due from the 
depositary depends upon circumstances, such as the 
nature and quality of the property and the character 
and customs of the place where it is to be kept. The 
facilities which the depositary has for taking care of the 
property are an important factor, and as the facilities of 
a bank in this respect are usually much greater than 
those of the generality of people, it would be bound to 
use what would be better care in the absolute, though 
not better care relatively. For instance, what might be 
sufficient care in a merchant might be negligence in a 
bank, and what might be good care for a bank in a 
small place might not be such for a bank in a large 
city. The general rule may be stated thus : Banks are 
bound to use such care in the keeping of special deposits as 

1 First Nat'l Bank of Carlisle v. Graham, ioo U. S., 699 ; S. C, 
79 Penn. St., 106; Pattison v. Syracuse Nat'l Bank, 80 N. Y., 
S2 ; Foster v. The Essex Bank, 17 Mass., 479. 

2 Pattison v. Syracuse Nat'l Bank, supra. 



DEPOSITS FOR SAFK-KKKPlNG. 25 

Persons of common prudence in their situation and busi- 
ness usually beitow in the keeping of similar property 
belongi?ig to themselves. 1 It is not enough to relieve the 
bank from liability, that it has kept the property of the 
depositor in the same place or with the same care that 
it kept its own property, if, in fact, there has been a 
want of due care. Thus, the fact that property of the 
bank was stolen at the same time and from the same 
place is not conclusive that there was sufficient care. 2 
Anything less than the amount of care required by law 
will be considered gross negligence, and if the property 
is lost through such negligence the bank will be liable 
for the loss. 3 But what circumstances will constitute 
gross negligence in any particular case is a question of 
fact. 4 

Illustrations. — As a general statement of the degree 
of care required in this matter may not convey a suffi- 
ciently definite idea for practical purposes, and this 
being a question of considerable importance to bankers, 
it may be worth while to give here a few illustrations of 
what has been considered gross negligence. In Pattison 



1 Foster v. Kssex Bank, 17 Mass., 479; First Nat'l Bank v. 
Ocean Nat'l Bank, 60 N. Y., 278; Pattison v. Syracuse Nat'l 
Bank, 80 N. Y., 82 ; Lancaster County Nat'l Bank v. Smith, 62 
Penn. St., 47 ; Scott v. Nat'l Bank of Chester Valley, 72 Penn. 
St., 471 ; First Nat'l Bank of Carlisle v. Graham, 79 Penn. St., 
106 ; Maury v. Coyle, 34 Md. , 235 ; Griffith v. Zipperwich, 28 
Ohio St., 388 ; United Society of Shakers v. Underwood, 9 Bush, 
609 ; Giblin v. McMullen, L. R. 2, P. C, 317. 

2 Pattison v. Syracuse Nat'l Bank, 80 N. Y., 82; Griffith v. 
Zipperwich, 28 Ohio St., 388. 

3 See cases cited in note 1. 

4 Griffith v. Zipperwich, 28 Ohio St., 388. See also other cases 
cited in note 1. 



26 PRATTS* MANUAL OF BANKING I, AW. 

v. Syracuse National Bank, 1 a New York case, the 
plaintiff had left a package of bonds with the bank, and 
these bonds were lost in some way that could not be 
made to appear positively ; but the bank claimed that 
they had been stolen from the safe by some person 
other than the employes of the bank. The evidence 
did not show any burglary, nor was there any direct 
explanation of the circumstances of the loss of the bonds ; 
but there was evidence tending to show that, if they 
were stolen, the theft was committed in the day-time 
while the bank was open. The testimony showed that 
the bonds were in a safe so situated as to be accessible 
to a person entering from the street ; that the persons 
in the bank were so placed that at times the safe was 
not in their view, and that sometimes the door of the 
safe was left open. Upon proper directions from the 
court, the jury found that the bank had been guilty of 
gross negligence. 

In Lancaster County National Bank v. Smith, 2 a case 
which arose in Pennsylvania, the facts were briefly 
these : Smith, a stranger, called at the bank and left 
with the teller $3,500 of government bonds for safe- 
keeping, and retained a memorandum of the numbers 
and the amounts thereof. The teller put the bonds 
into an envelope, and placed the envelope in the vault. 
Afterwards, when the circumstances of the deposit had 
passed out of the mind of the teller, a person came to 
the bank and called for the bonds. This person (who 
was afterwards shown to have been an impostor) gave 
his name and residence as that of the depositor, and 



1 8oN. Y., 82.. 
2 62 Penn. St., 47. 



DEPOSITS FOR SAPK-K^PING. 27 

described the bonds accurately; and upon this the 
teller delivered the bonds to him. The rightful depos- 
itor afterwards demanded the bonds, and brought suit 
for their value. The jury found that there had been 
gross negligence, and a judgment upon this verdict 
was sustained by the Supreme Court of the State. 

But in another Pennsylvania case, in which a robbery 
of the bank had been accomplished by a most ingenious 
device, calculated to succeed with the most careful 
person, a finding that there had been no negligence 
was sustained by the Supreme Court. 1 

Liability Where Special Deposit is Stolen by 
Officer or Agent. — Where a special deposit is lost 
through the dishonesty of an officer or employe, the 
bank will not be liable unless it can be shown to have 
had some knowledge of his dishonest character. 2 The 
law on this point was very clearly set forth by the 
Court of Appeals of Kentucky, in the case of Ray's 
Administrator v. Bank of Kentucky. 3 The court, 
speaking by Judge Lindsay, said: ''While the bank 
must exercise good faith in the selection of its agents 
and servants, and neither employ nor retain in its 
employment any person having access to the deposits 
whose integrity it has reason to question, still, as the 
depositor knows that the business of the corporation can 
be transacted in no other way than through the instru- 



*De Haven v. Kensington Nat'l Bank, 81 Penn. St., 95. 

2 Foster v. The Essex Bank, 17 Mass., 479; Scott v. Nat'l 
Bank of Chester Valley, 72 Penn. St., 471 ; Ray's Administrator 
v. Bank of Kentucky, 10 Bush, 344; Giblin v. McMullen, I,. R., 
2 P. C, 317. 

:; 10 Bush, 344. 



28 PRATTS* MANUAL Otf BANKING LAW. 

mentality of agents and servants, it is not unreasonable 
to hold that, as the corporation risks their honesty as to 
such of its property as is intrusted to their keeping, the 
bailor, who pays no compensation for the services he 
receives, takes the same risk as to the property deposited. 
Such diligence and care in the preservation of the 
deposits as a reasonably prudent person generally exer- 
cises in the care and preservation of his own property of 
like nature, and good faith in the selection of the agents 
to whom they are intrusted, is as much as a bailor, for 
whose accommodation deposits are received and held, 
can conscientiously require. 

"Unlike contracts of mandate, which generally imply 
labor and service, contracts of deposit, and especially 
such as those under consideration, are in their nature 
merely passive. If labor or service is to be performed, it 
is merely incidental, and is not the principal object of 
the contracting parties. In this case the bank was re- 
quired to do nothing more than to permit the deposits to 
remain in its vaults until called for by the depositor. Its 
cashier was charged with no other duty. It was not 
expected that he should for any purpose open the pack- 
age or bag. As to them, his whole duty consisted in 
using proper care and diligence in closing and fastening 
securely the doors of the vault and banking-house when 
business hours were over. 

" If he turned aside from the discharge of this negative 
or passive duty, and assumed to act for himself, clearly 
outside of the scope of his employment, and opened the 
package and bag, and appropriated the contents to his 
own use, then, unless the bank prior to such action had 
reasonable ground to suspect his integrity, it cannot be 
made to answer for his said fraud or felony. ' ' 



DEPOSITS FOR SAFE-KEEPING. 29 

What Will Constitute Gross Negligence in 
Such Case. — But in order to render the bank liable in 
such case it is not essential that the officer should ever 
have actually committed any dishonest act. It seems 
that if his mode of life or his outside connections are 
such as to greatly tempt him to appropriate to his own 
use the money and property of others, and this fact is 
known to his superiors, the retaining him in a position 
in which he has access to the property of the customer 
will be gross negligence, and the bank will be liable 
should such property be stolen by him. 1 Thus, where 
an assistant cashier, whose means were scant, was known 
to have been speculating in stocks at various times, and 
no measures were taken to ascertain whether he had 
misappropriated any of the special deposits, the bank 
was held liable for securities of a customer which were 
found after he had absconded to have been misappropri- 
ated and carried away by him. 2 And in a case where 
bonds left with the bank by a customer were stolen by 
the teller, the question of gross negligence turned upon 
the point whether the president had known that the 
teller was speculating in stocks ; and the court said that 
if the president had discovered that the teller was 
engaged in any dangerous outside operations, or in 
buying and selling beyond his evident means, his 
immediate dismissal would have been called for. 3 



1 Scott v. Nat'l Bank of Chester Valley, 72 Penn. St., 471; 
Prather v. Kean (U. S. C. C, N. D. 111., 1887), 29 Fed. Rep., 
498. 

'Prather v. Kean, supra. 

3 Scott v. National Bank of Chester Valley, supra. 



30 PRATTS' MANUAL OF BANKING LAW. 



CHAPTER VII. 



DEPOSITS WHEN BANK IS INSOLVENT. 

Is a Fraud to Receive Deposits in Such Case. — 

Where a bank has become irretrievably insolvent, so 
that there is no longer reason to suppose that it can 
continue business, the receiving of deposits, after the 
fact of the insolvency is known to the managing officers, 
is deemed a gross fraud upon the depositor. 1 In an 
anonymous case in New York, bankers who had sold a 
sight draft on London, when they were hopelessly in- 
solvent (their assets being insufficient to pay more than 
forty per cent, of their indebtedness), were arrested 
under a provision of the code which authorizes an arrest 
' ' when defendant has been guilty of a fraud in con- 
tracting the debt or incurring the obligation for which 
the action is brought." Upon an appeal from an order 
denying a motion to vacate the order of arrest, it was 
held by the Court of Appeals that the order of arrest 
was properly granted. The court stated the principle 
as follows : "In the case of bankers, where greater con- 
fidence is asked and reposed, and where dishonest 
dealings may cause wide-spread disaster, a more rigid 
responsibility for good faith and honest dealings will 
be enforced than in the case of merchants and other 
traders. A banker who is, to his own knowledge, 
hopelessly insolvent cannot honestly continue his busi- 
ness and receive the money of his customers ; and 
although having no actual intent to cheat and defraud 

1 Anonymous, 67 N. Y., 598; Cragie v. Hadley, 99 N. Y., 131. 



DEPOSITS WHEN BANK IS INSOLVENT. 3 1 

a particular customer he will be held to have intended 
the inevitable consequences of his act, i. <?., to cheat 
and defraud all persons whose money he receives, and 
whom he fails to pay, before he is compelled to stop 
business." x 

Depositor May Reclaim Funds in Such Case. — 

It is a general rule that one who has been induced to 
part with his property by the fraud of another, under 
guise of a contract, may, upon discovery of the fraud, 
rescind the contract and reclaim the property, unless it 
has come into the possession of a bona fide holder. 
Applying this principle to bank deposits the courts hold 
that a customer may reclaim funds deposited after the 
bank has become hopelessly insolvent, it being consid- 
ered, as we have seen above, a gross fraud on the part 
of the bank to receive them under such circumstances. 2 
In a case of this kind the contract which established the 
relation of debtor and creditor between the bank and the 
customer, being vitiated by the fraud, may be avoided 
by the customer, and he be restored to his original 
rights as the owner of the funds or their proceeds. 3 
And the creditors of the insolvent bank have no equities 
to have such property applied in payment of the obliga- 
tions of the bank. 4 But, of course, the right to reclaim 

x 67 N. Y., 598. Opinion by Earl, J. It is proper to state that 
three of the judges concurred in the result only. 

The constitution of Missouri makes the officers of a bank per- 
sonally liable for the deposits which they assent to being received 
after they know that the institution is insolvent. See Cummings 
v. Winn, 67 Mo., 256. 

2 Cragie v. Hadley, 99 N. Y., 131. 

3 Id. 

'Id. 



32 PRATTS' MANUAL OF BANKING LAW. 

may be defeated by the acts or acquiescence of the 
defrauded party, or because the property has lost its 
identity and cannot be traced, or because other persons 
have innocently acquired interests therein in ignorance 
of the fraud. 

Reclaiming Deposit on Ground of Fraud not a 
Preference. — The reclaiming of a deposit from an in- 
solvent bank, upon the ground that the bank was guilty 
of a fraud in accepting it, is not a preference within the 
meaning of statutes which forbid all preferential pay- 
ments or transfers by an insolvent bank, and provide 
for a ratable distribution of its assets among its creditors ; 
for in such case the party does not claim under a transfer 
from the bank, but under his original title, and he does 
not seek to enforce any right as a creditor of the bank, 
but merely to reclaim his own property obtained by 
fraud. 1 



CHAPTER VIII. 



PAYMENT OF DEPOSITS. 

Time Within Which Bank Must Pay. — Unless 
there is some contract or understanding to the contrary, 
the checks of a customer are payable immediately on 
demand, and the refusal of the bank to so pay a check 
is a breach of duty, for which an action will lie ; but, 
of course, the bank has a reasonable time within which 
to ascertain whether it has funds of the depositor out of 
which payment may be made. The leading case on 

^ragie v. Hadley, 99 N. Y., 131. 



PAYMENT OF DEPOSITS. 33 

this point is the English case of Marzetti v. Williams. 1 
The defendants were bankers in I/mdon, and the plaint- 
iff kept an account with them. On the evening of 
December 17th his balance was ^69 65. 6d. A few 
minutes before eleven o'clock on the morning of the 
19th a further sum of £4.0 was paid into his account. 
On the same day, about ten minutes before three 
o'clock, a check drawn by the plaintiff for £8j ys. 6d. 
was presented for payment. The clerk to whom it was 
presented, after having referred to a book, said there 
were not sufficient assets, but that it might probably go 
through the clearing-house. The check was paid on 
the following day. The action was in tort to recover 
damages for the refusal to pay the check when it was 
presented. The jury were instructed that a banker who 
receives a sum of money from his customer is bound to 
pay a check drawn by such customer after the lapse of 
such a reasonable time as would afford an opportunity 
to the different persons in the establishment of knowing 
the fact of the receipt of the money ; and they were 
directed to find for the plaintiff if they should be of the 
opinion that such a reasonable time had intervened be- 
tween the receipt of the money at eleven o'clock and 
the presentment of the check at three. The judge ob- 
served, also, that it could not be expected if a sum of 
money was paid to a clerk in a large banking office, 
and immediately afterwards a check presented to another 
clerk in a different part of the office, that the clerk to 
whom the check was presented should be immediately 
acquainted with the fact of the cash having been paid 
in, but a reasonable time must be allowed for that pur- 

l i B. & Ad., 415. 



34 PRATTS' MANUAL OF BANKING LAW. 

pose ; but he told the jury that in forming their judg- 
ment, whether such a reasonable time had elapsed, they 
must consider whether the defendant ought or ought 
not, between eleven and three o'clock, to have had in 
some book an entry of the ^40 having been paid in, 
which would have informed all their clerks of the state 
of the account. The jury found for the plaintiff. 

Customer May Recover Though No Actual 
Damage Shown. — In Marzetti ^.Williams the plaint- 
iff did not show that he had sustained any special 
damage, but the Court of King's Bench, upon a rule for 
a new trial, held that he was clearly entitled to nominal 
damages. The Chief Justice, L,ord Tenterden, placed 
his judgment on the ground that the action was 
' ' founded on a contract between the plaintiff and the 
bankers, that the latter, whenever they should have 
money in their hands belonging to the plaintiff, or 
within a reasonable time after they should have received 
such money, would pay his checks ; and there having 
been a breach of such contract, the plaintiff is entitled 
to recover nominal damages." In the subsequent case 
of Rolin v. Stewart, 1 which was an action brought by 
a firm of traders against their bankers for dishonoring 
their checks when they had sufficient funds on deposit 
to meet the checks, it was held that the plaintiffs could 
recover substantial damages, though they introduced 
no evidence to show that they had sustained any special 
damage. It was said by Williams, J. : "I think it 
cannot be denied that, if one who is not a trader were 

1 14 C. B., 595. The verdict in this case was for ^"500 damages, 
but it is inferred that this amount was afterwards reduced by 
agreement of counsel. 



PAYMENT OF DEPOSITS. 35 

to bring an action against a banker for dishonoring a 
check at a time when he had funds of the customer's 
in his hands sufficient to meet it, and special damages 
were alleged and proved, the plaintiff would be entitled 
to recover substantial damages. And when it is alleged 
and proved that the plaintiff is a trader, I think it is 
equally clear that the jury, in estimating the damages, 
may take into their consideration the natural and nec- 
essary consequences which must result to the plaintiff 
from the defendant's breach of contract, just as in the 
case of an action for a slander of a person in the way 
of his trade, or in the case of an imputation of insolv- 
ency in a trader, the action lies without proof of special 
damage. ' ' 

Order of Payments. — It is the general rule in the 
payment of running bank accounts that the deposits 
are presumed to be drawn out in the order in which 
they were made. It is the sum first paid in that is first 
drawn out. It is the first item on the debit side of the 
account that is discharged or reduced by the first item 
on the credit side. 1 In the leading case on this point 
the customer sought to travel back into the account 
several years in order to charge the estate of a deceased 
partner in the banking firm with a balance due him. 
But the Master of the Rolls refused to allow such a 
remolding of the account, and held that an ordinary 
banking account should be settled upon the same prin- 
ciples as other accounts current, viz., the principles 
stated above. 2 

But the general rule, that the first drawings out are 



Clayton's Case, 1 Mer., 572. 
2 Id. 



36 pr'atts' manual of banking law. 

to be attributed to the first payings in, will not be ap- 
plied where a fiduciary has deposited trust funds with 
money of his own to his individual account ; but he 
will be deemed to have drawn out his own money in 
preference to the trust moneys, no matter in what order 
the deposits were made. 1 

Statute of Limitations. — In England it is held 
that as money deposited with a banker by his cus- 
tomer in the ordinary way is money lent to the banker, 
with a superadded obligation that it is to be paid when 
called for by check, the statute of limitations is a bar 
to its recovery if it remains in the banker's hands for 
six years without any payment by him of the principal 
or allowance of interest. 2 But the American courts 
hold differently. In this country it is the well-settled 
rule that the statute of limitations does not begin to 
run against the depositor until he has made due demand 
of payment ; 3 for as the engagement of the bank is not 
to pay absolutely and immediately, but when proper 
demand is made, the bank is not in default and no 
cause of action arises before payment has been de- 
manded and refused.* 

There are certain exceptional cases in which a de- 
mand is dispensed with, as where a bank has stopped 
payment and closed its doors, or has claimed the deposit 



1 7n re Hallett's Estate, L,. R., 13 Ch. Div., 696, overruling 
in this point Pennell v. Deffell, 4 De G. M. & G., 374. 

2 Pott v. Clegg, 16 M. & W., 321. 

3 Girard Bank v. Bank of Penn Township, 39 Penn. St., 92 ; 
Johnson v. Farmers' Bank, 1 Harr., 117 ; Thomson v. The Bank of 
British North America, 82 N. Y., 1. 

4 Downes v. Bank of Charlestown, 6 Hill, 297. 



PAYMENT OF DEPOSITS. 37 

as its own in an account rendered to the depositor ; and 
in such cases the statute begins to run from the time 
the depositor has notice of the fact which dispenses 
with the demand. 1 

But a demand for the whole balance of deposit is not 
requisite to enable the depositor to maintain suit against 
the bank. Whenever a demand is made, by presentation 
of a genuine check in the hands of a person entitled to 
receive its amount for a portion of the sum on de- 
posit and payment is refused, a cause of action immedi- 
ately arises, and as to the amount specified in the check 
the statute of limitations begins to run from that time. 2 

Payment of Canceled and Stale Checks and 
Checks not Due. — If a bank pays a check which has 
been canceled, or to which the drawer has a defense, 
under circumstances which ought to have excited the 
suspicion of the bank officers and prompted them to 
make inquiries before paying it, the amount thereof 
cannot be charged to the depositor. 3 In the English 
case of Scholey v t Ramsbottom the depositor, having 
drawn a check, found the amount incorrect, and tore 
the instrument into four pieces and threw them away. 
Some unknown person took these four pieces and neatly 
pasted them together upon another slip of paper and 
presented the check for payment. The rents were quite 
visible, and the face of the check was soiled and dirty ; 



1 Bank of Missouri v. Benoist, 10 Mo. , 519 ; Watson v. Phenix 
Bank, 8 Mete. (Mass.), 217; Farmers' Bank v. Planters' Bank, 
10 G. & J., 422. 

2 Viets v. Union Nat'l Bank of Troy, 101 N. Y., 564. 

3 Scholey v. Ramsbottom, 2 Camp. , 485 ; The Lancaster Bank 
v. Woodward, 18 Penn. St., 357. 



3& PRA'TTS* MANUAL OF BANKING LAW. 

but it was paid by the bankers without making any in- 
quiries. L,ord Bllenborough was of the opinion that under 
these circumstances the bankers should not have paid 
the check, and the jury found in favor of the depositor. 

Banks should use great circumspection in paying 
checks long overdue, for the debt for which the check 
was given may have been otherwise discharged, or the 
drawer may have some other defense to the instrument. 
It is impossible to name any particular time when a 
check becomes so old that the bank paying it does so at 
the risk of letting in any defenses that the drawer may 
have ; this must necessarily depend upon the circum- 
stances of each case. In Lancaster Bank v. Woodward x 
the bank paid a check more than a year after its date, 
and when the drawer had not sufficient funds on deposit 
to meet it. Upon these facts it was held that the bank 
could not recover the amount from the depositor. In 
the course of the opinion in this case it was said by 
Woodward, J.: " Checks are no doubt often negligently 
retained and presented long after they should be, but 
when a bank sees that a customer appointed a day in his 
check for its payment, that that day has long since 
passed, and that no funds have been deposited to meet 
it, the bank must be held to the rule in regard to other 
overdue paper, and be presumed to have taken it on the 
credit of the indorser. These circumstances are suf- 
ficient to put the bank on inquiry, and therefore they 
are not to be regarded as innocent indorsees without 
notice. ' ' 

It is improper to pay a check before the day on which 
it bears date. In De Silva v. Fuller the plaintiff was 

i J The Lancaster Bank v. Woodward, 18 Penn. St., 357. 



PAYMENT OF DEPOSITS. 39 

holder of a check drawn on the defendants, who were 
bankers, dated the 18th June. On the 17th he lost the 
check, and on the same day the check was presented 
to the defendants, and was paid by them. It being 
shown to be contrary to the usual course of business to 
pay drafts before the day on which they were dated, the 
plaintiffs were allowed to recover. 1 Although this case 
was decided as long ago as 1776, the question does not 
appear to have been determined in any subsequent case, 
probably because this rule of the law merchant is uni- 
versally known to bankers and business men, and is 
always conformed to. 

Where Deposit is Claimed by Different Per- 
sons. — As we have seen elsewhere, money deposited in 
bank may be followed by the true owner, though the 
depositor made the deposit to his individual account and 
without notice to the bank of the real ownership. 2 ' 'As 
between the bank and the depositor, while the fund is 
still held by the bank, and it has not been misled by the 
apparent ownership induced by the state of the account 
to pay it out, or to incur responsibility for it to others 
by its own act or by the act of the law, the ownership of 
the fund can be shown to be different from the apparent 
ownership by the entry in the book." 3 As the courts 
recognize the right of the real owner to the deposit, it 
would be improper for the bank to pay the money to 
the depositor after having had notice of such ownership ; 
and if it does so pay out the money after receiving due 



1 Chitty on Bills (Sel. Cas.), 392. 

2 See chapter on Equities of Third Persons. 

3 Per Agnew, J., in Stair v. York Nat'l Bank, 55 Penn. St., 364. 



40 5PRATTS* MANUAL OI^ BANKING LAW. 

notice, it will be liable to the real owner. 1 Accordingly, 
where an agent procured the note of his principal to be 
discounted, and deposited the proceeds to his own credit, 
and the bank, after being notified by the principal that 
the funds belonged to him, paid checks to the agent, it 
was held that the principal could maintain an action 
against the bank for the amount paid out after such 
notice. 2 The court, by Rogers, J. , observed : " It is true 
that until the bank has notice they may consider the 
agent as the owner of the funds ; but when they are in- 
formed the money belongs to the principal, they are, as 
in justice they should be, placed in a different situation. 
They are stakeholders for the owner, and must at their 
peril pay it to him ; and to protect themselves they 
may require an indemnity. ' ' Whenever, therefore, there 
are conflicting demands and the bank stands in the 
position of a stakeholder, its only safe course before 
making payment to either claimant is to demand a bond 
or other form of indemnity to protect it from any loss. 3 
Or before making payment, the bank may insist that 
the question of ownership be determined by some com- 
petent tribunal, whose decision would be binding upon 
all the parties. 4 And the bank would be protected from 
all costs of such a proceeding not unnecessarily or un- 
reasonably occasioned by it. 5 

Cashing Checks Drawn on Other Banks. — It is 
a part of a legitimate banking business to cash checks 
or drafts drawn on other banks, whether this is regarded 

1 Frazier v. The Erie Bank, 8 W. & S., 18. 

*Id. 

3 Stair v. York Nat'l Bank, 55 Penn. St., 364. 

*Bushnell v. Chatauqua Nat'l Bank, 74 N. Y., 290. 



£aym£nt of deposits. 41 

as the making of a collection for the account of the cus- 
tomer, or as a loan or advance made on the faith of the 
instrument. 1 This is a question which has not often 
arisen for adjudication, being too plain for any contro- 
versy. But it does appear to have been raised in a 
small case in the Court of Common Pleas of New York 
City, where the point was determined as above stated. 2 

Bank not Required to see to the Application of 
Trust Moneys. — A bank is not bound to inquire when 
it pa3^s the checks of one whom it knows to be a fidu- 
ciary, whether he is in the course of lawfully performing 
his duties as such, but this it is bound to presume. 3 In 
the case of Gray v. Johnson, Lord Chancellor Cairns 
observed : ' ' The result of the authorities is clearly this, 
in order to hold a banker justified in refusing to pay 
a demand of his customer, the customer being an exec- 
utor, there must, in the first place, be some misapplica- 
tion, some breach of trust, intended by the executor, 
and there must, in the second place, as was said by Sir 
John L,each, in the well-known case of Keane v. Roberts, 
be proof that the bankers are privy to the intent to make 
this misapplication of the trust funds. And to that I 
think I may safely add, that if it be shown that any 
personal benefit to the bankers themselves is designed 
or stipulated for, that circumstance, above all others, 
will most readily establish the fact that the bankers are 
in privity with the breach of trust which is about to be 
committed. ' ' The depositor in the case referred to was 

1 Murray v. The Bull's Head Bank, 3 Daly, 364. 

2 Id. 

s Gray v. Johnston, L. R. 3, H. L. 1 ; Keane v. Roberts, 4 Madd.> 
357 ; Goodwin v. Bank of America, 48 Conn., 550. 



\1 PRATTS* MANUAL OF BANKING LAW. 

an executor, but what was said by the L,ord Chancellor 
is equally applicable to the case of any other fiduciary 

Overdrafts. — The practice of allowing overdrafts has 
been emphatically disapproved by several eminent 
judges. In the case of Lancaster Bank v. Woodward, 1 
it was said by Woodward, J. : "It was attempted to 
prove a custom to pay overdrafts of solvent dealers with 
banks, but it failed ; and if it had not failed, such a 
custom should be abolished. Malus usus abolendus est. 
Our banking institutions are generally conducted by 
the boards of directors, to whom stockholders look for 
the proper use and management of the capital invested ; 
whilst the ordinary routine of daily business is intrusted 
to the cashiers and clerks, who are not directors, gener- 
ally not stockholders, and who have no power to dis- 
count paper. If these subordinate officers might pay 
checks, which are properly drafts on funds deposited, 
when there were no funds of the drawer on deposit, the 
capital of banks would be liable to perversion to pur- 
poses and in modes that were never contemplated 
either by the legislature or the stockholders. That the 
practice of paying overdrafts has prevailed to some ex- 
tent is quite likely ; and it may be true that boards of 
directors have in some instances sanctioned it, but it 
has no authority in sound usage or in law. The more 
nearly these institutions keep in the line of regular 
business transactions, the more effectually will they ac- 
commodate the public and secure their own interests." 

Likewise, Justice Story, in Minor v. Mechanics' Bank, 2 
condemned the practice in very strong language, and 



x i8Penn. St., 357. 
2 1 Peters, 46. 



PAYMENT* OP DKPOSITS. 43 

Said it was a practice which could not receive any coun- 
tenance in a court of justice. So, an eminent Maryland 
judge observed that the customers of the public banks 
of that State had no accommodation credit, and that the 
officers of those institutions could not, without gross 
violation of their trust, honor any checks or drafts be- 
yond the amount of deposits standing to the credit of 
the drawers. 1 And similar views were expressed not 
long since by the St. Louis Court of Appeals. 2 

But notwithstanding the sweeping language used in 
the cases cited, they are none of them authorities for the 
broad proposition that it is improper to allow an over- 
draft in any event, for either this point was not directly 
involved in the case, or there were other elements 
present, which would have rendered the particular 
transactions improper, even though overdrafts of them- 
selves be not objectionable. In Bank of Albany v. 
Ten Kyck, 3 Earl, Commissioner, observed: "It is not 
an uncommon thing for bankers to permit overdrafts, 
with the understanding that the account should be 
made good before the close of banking hours on that 
day or soon after ; and whether such overdrafts are 
prudent or not depends upon the character and stand- 
ing of the drawer, and upon the circumstances of each 
case." And in some of the English cases it appears to 
be assumed that overdrafts may properly occur in the 
ordinary course of the dealings between banks and their 
customers.* Perhaps the true rule is this : that whether 

1 Eichelberger v. Finley, 7 Harr. & Johns., 381, per Dorsey, J. 

2 Market Street Bank v. Stumpe, 2 Mo. App. , 540. 
3 4 8N. Y., 305. 

4 See, for instance, Waterlow v. Sharp, I,. R., 8 Eq., 501. 



44 :pratts' manual of banking law. 

it is improper to allow an overdraft depends entirely upon 
the facts of the case, and whether, taking all the sur- 
rounding circumstances into consideration, it is reason- 
able and prudent. 



CHAPTER IX. 



PAYMENT OF CUSTOMERS' NOTES AND 
ACCEPTANCES. 

It is the well-settled rule in England that when a 
customer makes his paper payable at his banker's, this 
is tantamount to an order to the banker to pay it out 
of the money of the customer on deposit. 1 And this is 
also the general rule in America. It is true that in 
several cases judges have said that the bank would not 
be authorized to pay without an express order or request 
from the customer ; 2 but the great weight of authority 
is the other way. 3 In New York it has been said : "An 
acceptance or promissory note thus payable is, if the 
party is in funds, that is, has the amount to his credit, 
equivalent to a check, and is in effect an order or draft 
on the banker, in favor of the holder, for the amount of 
the note or acceptance." 4 And in another case in that 

1 Foster v. Clements, 2 Camp., 17 ; Robarts v. Tucker, 16 Q. B., 
500; S. C, 4E. L. &B., 236. 

2 Scott v. Shirk, 60 Ind., 160 ; Wood v. Merchants' Sav., L,oan, 
& Trust Company, 41 111., 267 ; Ridgeley Nat'l Bank v. Hamil- 
ton, 109 111., 479. 

3 Commercial Bank v. Hughes, 17 Wend., 94; iE^tna Nat'l 
Bank v. Fourth Nat'l Bank, 46 N. Y., 82 ; Indig v. Nat'l City 
Bank, 80 N. Y., 100 ; Commercial Nat'l Bank v. Henninger, 105 
Penn. St., 496 ; Home Nat'l Bank v. Newton, 8 Bradwell, 563. 

4 ^tna Nat'l Bank v. Fourth Nat'l Bank, supra. 



customers' notes and acceptances. 45 

State it was said : "A note payable at a bank where 
the maker keeps his account is equivalent to a check 
drawn by him upon that bank, except that in the case 
of a note the failure to present for payment does not 
discharge the maker. " x In a recent case in the Supreme 
Court of Pennsylvania, Paxson J., after quoting the 
above extract from the opinion in JEtna National Bank 
v. Fourth National Bank, said : " I do not understand 
this principle to be disputed. The note, therefore, was 
a draft on the bank against the deposit of the maker. 
It was the equivalent to a peremptory order on the bank 
to pay, or, to speak more accurately, to charge the notes 
against the deposit. ' ' 2 And in a very able opinion by 
Wilson, J., in the Appellate Court for the First District 
of Illinois, it was said : " As it is the duty of the bank 
to pay customers' checks when in funds, so at least it 
has authority, if it is not under actual obligation, to pay 
his notes and acceptances made payable at the bank." 3 

Whether Bank is Bound to Apply Funds. — 
While there would seem to be little doubt that banks 
may pay the notes and acceptances of their customers 
without any express direction, it is not equally clear 
whether they are required to do so. If the note or ac- 
ceptance is to be regarded as an order to pay, or as 
equivalent to a check, then the bank would seem to be 
under an obligation to pay it. But there does not ap- 
pear to be any case in which this has been expressly 



x Indig v. Nat'l City Bank, 80 N. Y., 100. 

2 Commercial Nat'l Bank v. Henninger, 105 Penn. St., 496. 

3 Home Nat'l Bank v. Newton, 8 Bradwell, 563. 



46 PRATTS' MANUAL OF BANKING IyAW. 

held to be a duty which the bank owes to its customer. 1 
There are a number of cases in which it has been de- 
cided that the bank is not under an obligation to pay, 
even where it has the right to do so ; but in all these 
cases the bank was itself the holder of the bill or note, 
and its rights and duties were those of a creditor, and 
not those of an agent to pay, and like any other credi- 
tor, it was not obliged to set off the one debt against 
the other, unless it saw fit to do so. 2 

But what is said in this section is of general applica- 
tion only as between the bank and the principal debtor 
on the instrument ; in some States, as we shall sec in 
the next section, a different rule obtains where the 
rights of indorsers and sureties intervene. 

Duty of Bank to Collect From Principal Debt- 
or. — It is a well established equitable principle in many 
jurisdictions that a creditor who has the means of col- 
lecting the debt from the principal debtor, or out of 
his property, ought, in justice to a surety, to avail him- 
self of those means, and that if he fails to do this, and 



1 Whitaker v. The Bank of England (6 C. & P. , 700) is some- 
times cited as an authority for the proposition that a bank is 
obliged to pay the acceptances of its customer made payable 
there, and that for failing so to do it will be liable to him for 
damages. But in this case there was an express understanding 
between the bank and the customer that the bank would pay his 
acceptances, upon certain conditions. And it appears that it is 
the general* practice of English bankers to make provision for 
paying the acceptances and promissory notes of their customers 
in the table of printed terms upon which they deal with persons 
who keep accounts with them. 

2 Marsh v. Oneida Nat'l Bank, 34 Barb., 298 ; Citizens Bank v. 
Carson, 32 Mo., 191 ; Second Nat'l Bank v. Hill, 76 Ind., 223. 



customers' notes and acceptances. 47 

surrenders up the means of so making the debt, he dis- 
charges the surety. Applying this principle where a 
bank is the holder of an obligation on which a depositor 
is the principal debtor, the courts of several States have 
ruled, that if a bank has funds of the depositor which it 
may apply to the payment of the instrument at its ma- 
turity, and does not do so, but allows the depositor to 
draw them out, that this discharges the indorsers and all 
parties to the instrument who are merely sureties. 1 
This principle was acted upon by the Supreme Court of 
Pennsylvania in a recent case. 2 The facts, as briefly 
stated by Paxson, J. , were these : ' ' The defendant was 
the indorser of the notes in suit. The maker was B. F. 
Young, who was also the cashier of the bank. The 
notes had been discounted by the bank, and were pay- 
able there. On the day they matured, at the close of 
banking hours, there was on deposit to the credit of 
Mr. Young a balance sufficient to meet the notes. In- 
stead of charging up the notes against the deposit, the 
cashier handed them to a notary for protest. The ob- 
ject of this was to hold the indorser, and compel him to 
proceed against the maker in order to let in a defense 
which the maker could not set up against the bank. 
The defendant contends that the failure of the bank to 
charge up the notes against Mr. Young's deposit re- 
lieved him as indorser. ' ' The grounds upon which the 
court based its decision sufficiently appear in the follow- 
ing extracts from the opinion : ' ' When the depositor 
becomes indebted to the bank on one or more accounts, 

1 Commercial Nat'l Bank v. Henninger, 105 Perm. St., 496; 
McDowell v. Bank of Wilmington and Brandywine, 1 Harrington 
(Del.), 369 ; Dawson v. Real Estate Bank, 5 Ark., 283. 

2 Commercial Nat'l Bank v. Henninger, supra. 



48 PRATTS' MANUAL OF BANKING LAW. 

and such debts are due and payable, the bank has the 
right to apply any deposit he may have to their pay- 
ment. This is by virtue of the right of set-off. Where 
a general deposit is made by one already indebted to 
the bank, the latter may appropriate such deposit to 
the payment of such indebtedness. This results from 
the general doctrine of the application or appropriation 
of payments. And it may be safely asserted, that as a 
general rule the former may waive the right to make 
such application, and allow the depositor to draw out 
his balance. Where, however, the rights of third per- 
sons intervene, the case is sometimes different. * * * 
The bank being indebted to Young when his notes 
matured in an amount exceeding the notes, the latter 
had the clear right to set-off so much of his deposit as 
was necessary to meet the notes. The defendant as 
surety was entitled to avail himself of Young's right. 
It may be illustrated thus : If I am the holder of A's 
note, indorsed by C, and when the note matures I am 
indebted to A in an amount equal to or exceeding the 
note, can I have the note protested and hold C as in- 
dorser ? It is true, A's note is not technically paid, but 
the right to set-off exists, and surely C may show, in 
relief of his obligation as surety, that I am really the 
debtor instead of the creditor of A. If this is so be- 
tween individuals, why is it not so between a bank and 
individuals ? ' ' 

This principle, that a surety will be discharged by the 
failure of the bank to pay the obligation out of the 
principal debtor's deposit, has likewise been acted upon 
in Delaware. 1 And the New York Court of Appeals, 

1 McDowell v. Bank of Wilmington and Brandywine, i Har- 
rington, 369. 



customers' notes and acceptances. 49 

in the case of Bank of Fishkill v. Speight, appears to 
have assumed that this would be the rule, unless for 
some reason the deposit is inapplicable to the purpose. 1 
But in Indiana it has been held that a surety has no 
right to insist that the bank shall pay the instrument 
out of the deposit of the maker or acceptor. 2 And this 
view is probably the more consistent with the rules 
which in most States govern the relation between the 
holder of negotiable paper and the sureties thereon. 3 

But the rule that the bank owes to the surety the 
duty of paying the obligation out of the deposit of the 
maker or acceptor cannot apply where the deposit is 
special, or where there is some understanding between 
the bank and the depositor that the note or bill is a 
matter of itself, and not to be included in the general 
account between them. 4 Thus, in the above-cited case 
of Commercial Bank v. Henninger, the court said : "It 
must be conceded that if the deposit had been special, 
or if, previous to the maturity of the note, an arrange- 
ment had been made between the depositor and the 
bank, by which the bank had been forbidden to apply 
the money in its hands to the payment of these notes, 
the indorser would not be discharged. " 5 In National 
Bank of Fishkill v. Speight, the New York Court of 
Appeals held : "If before the maturity of paper held by 



X 47N. Y., 668. 

2 Second Nat'l Bank v. Hill, 76 Ind., 223. 

3 See Glazier v. Douglas, 32 Conn., 393. 

4 Nat'l Bank of Fishkill v. Speight, 47 N. Y., 668; People's 
Bank of Wilkes-Barre v. Legrand, 103 Penn. St., 309 ; Nat'l 
Mahaiwe Bank v. Peck, 127 Mass., 302 ; Martin v. Mechanics' 
Bank, 6 H. & J. (Md.), 271. 

5 105 Penn, St., 496. 



50 PRATTS' MANUAL OF BANKING LAW, 

a bank against a depositor an arrangement is made by 
which the bank agrees to hold the deposit for a specific 
purpose, and not to charge the note against it, the bank 
may be regarded as a trustee, and the deposit special. 
In such a case, in the absence of fraud or collusion, an 
indorser upon such paper has no right to require the 
application of the deposit towards the payment of the 
paper upon its maturity. ' ' And upon this same gen- 
eral principle the Supreme Court of Massachusetts, in 
National Mahaiwe Bank v. Peck, ruled that : "Where, 
by express agreement, or by a course of dealing between 
a bank and one of its depositors, a certain note of the 
depositor is not included in the general account between 
them, any balance due from him to the bank when the 
note becomes payable is not to be applied in satisfaction 
of the note, even for the benefit of the surety thereon, 
except at the election of the bank. ' ' And it may be 
said in general, that the surety will not be released un- 
less the principal debtor has funds sufficient to pay the 
obligation on deposit at the time of its maturity ; the 
fact that he deposits funds sufficient for the purpose 
subsequent to that time will not effect this result. 1 

Certification of Notes and Acceptances. — When 
paper payable at a bank is presented by an individual 
the money is ordinarily paid upon it and the paper is 
left with the paying bank. But when it is presented 
through another bank in the same place, the usual cus- 
tom is for the bank at which it is payable, instead of 
actually paying the money upon it, to certify it as good, 

x Nat'l Bank of Newburgh v. Smith, 66 N. Y., 271 ; Voss v. 
German American Bank, 83 111., 599 ; Martin v. Mechanics' 
Bank, supra. 



FORGED AND AI/FERED ORDKRS. 5 1 

in the same manner that checks are certified, and it is 
then taken back to the presenting bank, and is included 
in the general settlement of that day or the next. The 
legal effect and force of snch a certificate is that the 
maker has funds in the bank applicable to the payment 
of the instrument, and that the bank will hold the same 
for that purpose, and will pay the amount on request. 
It is equivalent to the payment of the instrument by the 
maker, and the substitution of the certifying bank as 
the debtor for the amount thereof. The obligations and 
liabilities of the bank are not different in such case from 
what they are where the instrument certified is a check, 
and the rules which apply to certified checks are equally 
applicable to certified bills and notes. 1 



CHAPTER X. 



PAYMENT UPON FORGED AND AI/fERED 

ORDERS. 

The law imposes upon the bank the duty of ascer- 
taining the genuineness of the depositor's orders, and 
if it pays upon an order which is not genuine the 
amount cannot be charged against the depositor's ac- 
count. 2 

1 Meads v. Merchants' Bank, 25 N. Y., 143. Irving Bank v. 
Wetherald, 36 N. Y., 335. For the rules governing certification 
of checks, see chapter on that subject. 

2 Crawford v. West Side Bank, 100 N. Y., 50 ; I,evy v. Bank of 
the United States, 4 Dall., 234; S. C, 1 Binney, 27; Belknap v. 
Nat'l Bank of North America, 100 Mass., 379; Nat'l Bank of 
North America v. Bangs, 106 Mass., 441 ; First Nat'l Bank z/. 
Tappan, 6 Kans., 466; Hall v. Fuller, 5 B & C, 750. 



52 PRATTS' MANUAL OF BANKING LAW. 

In the English case of Hall v. Fuller 1 it was said by- 
Bailey, J. : ' ' If the banker unfortunately pays money 
belonging to the customer upon an order not genuine 
he must suffer, and to justify the payment he must 
show that the order was genuine, not in the signature 
only, but in every respect. ' ' The principles upon which 
this obligation rests were very clearly explained by the 
present Chief Judge of the New York Court of Appeals, 
in the case of Crawford v. West Side Bank : 2 " The re- 
lation existing between a bank and its depositor," said 
that learned judge, " is, in a strict sense, that of debtor 
and creditor ; but in discharging its obligation as a 
debtor the bank must do so subject to the rules obtain- 
ing between principal and agent. In disbursing the 
customer's funds it can pay them only in the usual 
course of business and in conformity to his directions. 
In debiting his account it is not entitled to charge any 
payments except those made at the time when, to the 
person whom, and for the amount authorized by him. 
It receives the depositor's funds upon the implied con- 
dition of disbursing them according to his order, and 
upon an accounting is liable for all such sums deposited 
as it has paid away without receiving valid direction 
therefor. The bank is from necessity responsible for 
any omission to discover the original terms and condi- 
tions of a check once properly drawn upon it, because 
at the time of payment it is the only party interested 
in protecting its integrity who has the opportunity of 
inspection, and it therefore owes the duty to its depos- 
itors of guarding the fund intrusted to it from spolia- 
tion. This liability arises, although an alteration of a 

X 5B. &C, 750. 
2 100 N. Y., 50. 



FORGED AND AI/fERED ORDERS. 53 

material part of his order has been effected, even though 
it be done so skillfully as to defy detection by examina- 
tion. This follows from the fact that after it is put in 
circulation it passes from beyond the reach of its maker, 
who has no opportunity until after it has fulfilled its 
office of inspecting it and protecting himself from the 
loss occasioned by a fraudulent alteration. This oppor- 
tunity the banker has, and he is responsible for any 
want of vigilance in detecting the alteration of an order 
after it has once been correctly drawn, with its blank 
spaces properly filled up, and is put in circulation by 
the maker. ' ' And in the course of this opinion it was 
also observed that the questions arising on such paper 
between the bank and the depositor ' ' always relate to 
what the one has authorized the other to do. They 
are not questions of negligence or of liability of parties 
upon commercial paper, but are those of authority 
solely." 

When Depositor is Negligent Loss Must Fall 
on Him. — But the rule which casts the loss upon the 
bank, when it pays upon an order which is not genuine, 
is not applied indiscriminately and regardless of the 
circumstances. If both parties are innocent, and there 
is no negligence, the bank must suffer the loss. But 
where the depositor, by his conduct, has misled the 
bank, or has neglected to exercise the degree of care 
which the law requires of him, he will not be heard to 
question the genuineness of the instrument. 1 Accord- 
leather Manufacturers' Nat'l Bank v. Morgan, 117 U. S., 96; 
Hardy v. Chesapeake Bank, 51 Md., 562 ; Dana v. Nat'l Bank of 
the Republic, 132 Mass., 158 ; De Feriet v. Bank of America, 23 
I^a. Ann., 310; Young v. Grote, 4 Bing., 253. 



54 PRA'TTS' MANUAL OF BANKING UW. 

ingly, where a depositor having been shown a check 
which had been forged by his confidential clerk, said 
he had not signed it, but declined to say it was a forgery, 
and after having had an interview with the clerk, reported 
to the bank that it was all right, and continued the 
clerk in his employ, it was held that, having by his 
approval and ratification of the first forgery misled the 
bank and thrown it off its guard, he was precluded 
from holding it liable for paying a second check forged 
by the clerk, which was drawn in all respects similar to 
the first. 1 So, if the customer has failed to bestow upon 
the examination of his bank-book and vouchers the 
degree of care which the law imposes upon him, he may 
be estopped from disputing the genuineness of a check 
included in that account. 2 And upon the same prin- 
ciple, if the customer sends forth a check filled out in 
such a manner as to invite an alteration in the amount, 
he may be held by the bank for the sum to which the 
check has been raised. 3 

The frequently cited English case of Young v. Grote 
affords an excellent illustration of the last-mentioned 
application of this principle. A customer of a bank, on 
leaving home, intrusted to his wife several blank forms 
of checks signed by himself, and desired her to fill them 
up according to the exigency of his business. She filled 
up one with the words "fifty-two pounds two shillings" 
beginning the word ' ' fifty, ' ' with a small letter in the 



*De Feriet v. Bank of America, 23 La. Ann., 310. 

2 Leather Manufacturers' Nat'l Bank v. Morgan, 117 U. S., 96; 
Hardy v. Chesapeake Bank, 51 Md., 562. As to the amount of 
care due from the depositor in this matter see chapter on The 
Lank-Book. 

3 Young v. Grote, 2 Bing., 253. 



FORGKD AND AI/TKRED ORDERS. 55 

middle of a line. The figures "52:2" were also placed 
at a considerable distance to the right of the printed "jQ." 
She gave the check thus filled up to her husband's clerk 
to get the money. The clerk, before presenting it, in- 
serted the words "three hundred" before the word 
' ' fifty, ' ' and the figure " 3 " between the printed ' ' £ " 
and the figures "52:2," so that the instrument then 
had the appearance of a check in the regular form for 
three hundred and fifty-two pounds and two shillings, 
and this amount the bankers paid upon it. Upon these 
facts, the court held that the customer must bear the 
loss, the forgery having been invited by the improper 
mode in which the check was filled up. 

Forged Indorsement of Payee. — Where the in- 
strument is drawn payable to the order of the payee, 
the bank is bound to ascertain the genuineness of the 
payee's indorsement ; and if it pays upon a forged in- 
dorsement, it cannot discharge itself in account with the 
customer ; for the only authority which the customer 
has conferred upon it is to pay on the order of the per- 
son whom he has named. 1 And although the person 
to whom the payment is made has the rightful posses- 
sion of the instrument, yet the bank is not authorized 
to pay the same to such person without the genuine 
indorsement of the payee. 2 If the bank relies upon 
false representations as to identity of the payee, for 
which neither the drawer nor the payee is responsible, 
it makes payment at its peril. 3 And no custom or 

^obarts v. Tucker, 16 Q. B., 500; Morgan v. Bank of the 
State of New York, 11 N. Y., 404; Welsh v. German American 
Bank, 73 N. Y, 424. 

2 Dodge v. Nat'l Exchange Bank, 30 Ohio St., 1. 

3 Id. 



56 PRATTS* MANUAL OP BANKING LAW. 

usage among bankers as to the mode of ascertaining the 
identity of the person indorsing the name of the payee 
will relieve the bank from loss should the indorsement 
be a forgery. 1 

When the Amount may be Charged Against 
the Depositor. — Where a check which has had a 
legal inception, that is to say, was a valid instrument 
when put in circulation, is afterwards altered in 
amount, the bank may charge the drawer with the 
sum for which it was originally drawn. 2 But if it has 
been vitiated by alteration before it could take effect 
as a valid and complete instrument, then the bank 
cannot hold the depositor for anything paid on it. 3 
Thus, where an employer, intending to be absent from 
his place of business for a few days, drew his check 
and post-dated it, and left it with a clerk with instruc- 
tions to draw the money at the proper time, to pay the 
wages of the workmen, and the clerk, before the date 
when the check was to take effect, took it and changed 
the date and drew the money upon it, it was decided 
that the bank could not, by holding the check until 
its proper date, charge the depositor with the amount ; 
for the possibility that the instrument could ever be- 
come a legal liability was destroyed by the fraudulent 
alteration.* 

Bank Cannot Recover Money Paid on Forged 
Signature. — It is an elementary rule in the law of 
commercial paper that the drawee is presumed to know 

1 Dodge v. Nat'l Exhange Bank, 30 Ohio St., 1. 

2 Hall v. Fuller, 5 B. & C, 750. 

3 Crawford v. West Side Bank, 100 N. Y., 50. 



FORGED AND Al/f£R£D ORDERS. 57 

the signature of the drawer ; and if he pays a bill to 
which the drawer's name has been forged he is bound 
by the act and cannot recover the money. The law 
proceeds upon the theory that the drawee must know 
the signature of his correspondent much better than 
the holder can, and that, therefore, the holder may 
cast upon him the entire responsibility of determining 
as to the genuineness of the instrument. If he fails to 
discover the forgery the law imputes to him negligence, 
and although he has made the payment under a mis- 
take, and parts with his money without receiving the 
supposed equivalent, and although the holder has 
obtained the money without consideration, still the 
drawee cannot be relieved from the consequences of 
his neglect at the expense of the holder, and the latter 
may retain the money in equity and good conscience. 
This rule has been held to apply with peculiar force to 
bankers in the payment of checks, for the special pur- 
pose of a deposit is that it may be drawn against, and 
bankers have a better opportunity, and more reason, 
to know the signatures of their depositors than a drawee 
has to know the signature of a correspondent whose 
bills are drawn less frequently. And, therefore, if a 
bank makes payment to a bona fide holder, upon a 
check to which the name of a depositor has been forged, 
it cannot recover the money so improperly paid. 1 

But the doctrine that the drawee cannot recover 
money paid by him upon the forged signature of the 

'Levy v. Bank of the United States, 4 Dallas, 234; S. C, 1 
Binney, 27 ; Nat'l Park Bank v. Ninth Nat'l Bank, 46 N. Y., 77 ; 
Bank of St. Albans v. Mechanics' Bank, 10 Vt., 141 ; Commer- 
cial & Farmers' Nat'l Bank v. First Nat'l Bank, 30 Md., 11. 



58 PRATTS' MANUAL OF BANKING LAW. 

drawer applies in strictness only where the paper is 
actually presented to the party, and accepted or paid on 
or after such presentation. Where the payment is made 
without presentation and subject to future examination 
of the paper, the case is not within this rule. Accord- 
ingly, if a bank pays without having had an opportunity 
to inspect the paper, it will not be precluded from re- 
covering back the money paid, unless its neglect to 
give notice of the forgery within due time has misled 
the other party to his injury. 1 

But May Recover Where Fault is 'With Other 
Party. — And this rule presupposes that the holder has 
acted in good faith and has not neglected any duty 
which he owed the bank in the matter. In Bllis v. 
Ohio Iyife Insurance and Trust Company, 2 a case 
frequently referred to, it was said by the Supreme 
Court of Ohio : ' ' To entitle the holder to retain 
money obtained by mistake upon a forged instrument, 
he must occupy the vantage ground by putting the 
drawee alone in the wrong ; and he must be able truth- 
fully to assert that he put the whole responsibility 
upon the drawee and relied upon him to decide, and 
that the mistake arising from his negligence cannot 
now be corrected without placing the holder in a worse 
position than though payment had been refused. If 
the holder cannot say this, and, especially, if the failure 
to detect the forgery, and consequent loss, can be traced 
to his own disregard of duty, in negligently omitting to 
exercise some precaution which he had undertaken to 
perform, he fails to establish a superior equity to the 

1 Allen v. Fourth Nat'l Bank, 59 N. Y., 12. 
2 4 Ohio St., 628. 



PORG£D AND AI/TKRKD ORDERS. 59 

money, and cannot, with a good conscience, retain it. 
To allow him to do so would be to permit him to take 
advantage of his own wrong, and to pervert a rule, 
designed for his protection against the negligence of the 
drawee, into one for doing injustice to him." And it 
was also observed in this case, ' ' that where the negli- 
gence reaches beyond the holder, and necessarily affects 
the drawee, and consists of an omission to exercise 
some precaution, either by the agreement of the parties 
or the course of business devolved upon the holder, in 
relation to the genuineness of the paper, he cannot, in 
negligent disregard of this duty, retain the money 
received upon a forged instrument." And the same 
doctrine has been enunciated by other courts. 1 

In Ellis & Morton v. Ohio L,ife Ins. and Trust Com- 
pany, 2 above referred to, a check drawn upon the plaint- 
iffs was presented by a stranger to the defendants, who 
advanced the money upon it without requiring him to 
be identified. The same day the defendants sent it to 
the plaintiffs with other items of exchange, and it was 
included in the payment of the general balance. Ten 
days afterwards the check was discovered to be a 
forgery, and it was returned to the defendants and re- 
payment demanded. Upon the trial the plaintiffs intro- 
duced evidence to show that it was a general custom in 
Cincinnati, when a check was presented by a stranger to 
a bank not the one upon which it was drawn, to make 
inquiries in reference to his right to the check, and the 

1 First Nat'l Bank v. Ricker, 71 111., 439; Rouvaut v. San 
Antonio Nat'l Bank, 63 Tex., 610. See, also, Leather Manu- 
facturers' Nat'l Bank v. Morgan, 117 U. S., 96; Hardy v. Chesa- 
peake Bank, 51 Md., 562. 

2 4 Ohio St., 628. 



60 PRATTS' MANUAL OF BANKING LAW. 

identity of the person. And with a view to showing 
that the conduct of the defendants had misled them, 
they submitted evidence to prove their uniform custom 
of making such inquiries, when a check of this char- 
acter, drawn upon them, was presented by a stranger, 
and that there was not generally so strict a scrutiny 
when checks came from other banks, it being presumed 
that caution had already been exercised. The plaint- 
iffs were non-suited in the court below, but the Supreme 
Court held that the evidence adduced by them should 
have been submitted to the jury, and accordingly the 
judgment of the lower court was reversed ; and it was 
said that should the plaintiffs be able to satisfy a jury 
of the state of facts which this evidence conduced to 
prove, they would establish a clear right to recover ; for 
such custom being shown to exist, the failure of the 
defendants to require the person for whom they cashed 
the check to be identified was such negligence as would 
throw the loss upon them. 

Where the depositor does not sign his name, but 
makes his mark, the drawee bank has the right to as- 
sume that the bank from which the paper is received 
has had him properly identified, and if the order is 
forged may recover from such bank the amount paid 
upon the instrument. 1 

1 State Nat'l Bank v. Freedmen's Savings and Trust Co., 2 
Dillon, 11. 

The State National Bank of Keokuk issued a certificate of 
deposit to one Tim Dunivan, who, being unable to write, made 
his mark in the signature book of the bank, the officers of the 
bank entering his description opposite the mark. This certificate 
was afterwards stolen from Dunivan, and was presented at the 
counter of the Freedmen's Savings and Trust Company in St. 
Louis by a stranger, with the request that it be cashed. The 



FORGED AND AI/fERED ORDERS. 6 1 

On the principle that the holder must do nothing to 
mislead the bank, it is held that if he takes the instru- 
ment under suspicious circumstances, and gives it credit 
by indorsing his name thereon, the bank may recover 
from him ; for his receiving and indorsing the instrument 
would have a tendency to throw the officers off their 
guard, and cause them to accept and pay it, without 

cashier declined to advance the money upon it, but took it for 
collection. The cashier asked the stranger if his name was Tim 
Dunivan, and he replied in the affirmative. He was then asked 
if he could write his name, to which he replied that he could not. 
The cashier then wrote upon the instrument the following 
indorsement : " Pay to the order of W. N. Brant, cashier, 

tllS 

Tim x Dunivan, " the person himself making the mark; and 

mark 
this was witnessed by W. P. Brooks, an employe of the bank. 

The certificate was then forwarded to a correspondent, to whom 

it was paid by the bank which issued it. Afterwards, upon the 

discovery of the forgery, the Keokuk Bank paid the amount to 

the real Tim Dunivan, and brought suit therefor against the 

Savings and Trust Company. Treat, District Judge, charged the 

jury that the case turned mainly on the question of negligence, 

and after explaining the general rule that a bank paying on the 

forged signature of a customer must lose the amount, said : "This 

is a different case. There was a person who could not write. 

The bank gave him the certificate and took his description. The 

ordinary mode when a person signs by his mark is to have him 

identified, so that a piece of paper coming back to the Keokuk 

Bank through respectable institutions, with the depositor's mark 

on the back of it witnessed by another party, the bank issuing 

the certificate would have the right to suppose that the bank 

sending the certificate had so identified the man making his 

mark. The witness's signature is proven. Mr. Brooks himself 

says he signed it. The simple fact, then, that the paper comes 

back to the Bank of Keokuk with a mark witnessed by Mr. 

Brooks, which means that he knew Mr. Dunivan to be the person 

who made that mark, is sufficient to justify the Keokuk Bank in 

paying the draft." 



62 PRATTS' MANUAL OP BANKING LAW. 

subjecting it to the same scrutiny as if it had been in- 
dorsed and presented by a stranger. 1 

Bank may Recover when Alteration is in the 
Body of the Instrument. — But the bank is not bound 
to know that the check is genuine in any respect other 
than the signature. The presumption that the officers 
of the bank know the signature of the drawee better 
than the holder can is reasonable and just. But, as was 
observed in the case of the Bank of Commerce v. Union 
Bank, 2 a rule which would require the bank to know 
the handwriting of the residue of the check would be 
not only arbitrary and rigorous, but unjust. As the 
check is frequently filled up in the handwriting of some 
person other than the drawee, there can be no presump- 
tion that the opportunities of the bank for knowing 
whether the body is genuine are any better, or even as 
good, as those of the holder, who knows the person from 
whom he received the check, and the circumstances 
under which it was issued. So far as regards the body 
of the check, the presumption is that each party to it 
takes it on the credit of the prior parties, and the greater 
negligence is chargeable to the holder for taking it. 3 

When, therefore, the bank has paid a check which 
has been altered in the amount, the name of the payee, 
or the date, it may recover from the person to whom it 



1 Rouvaut v. San Antonio Nat'l Bank, 63 Tex., 310 ; First Nat'l 
Bank v. Ricker, 71 111., 439. 

2 3N. Y., 230. 

3 Bank of Commerce v. Union Bank, 3 N. Y., 230 ; Nat'l Park 
Bank v. Ninth Nat'l Bank, 46 N. Y., 77; Redington v. Woods, 
45 Cal., 406. See also Marine Nat'l Bank v. City Nat'l Bank, 59 
N Y., 67 ; Espy v. Bank of Cincinnati, 18 Wall., 604. 



FORGED AND ALTERED ORDERS. 63 

made such payment, even though he is a bona fide holder 
for value. 1 But if the bank is chargeable with neglect 
which has operated to the injury of the other party, 
then, as against a dona fide holder, it must sustain the 
loss. What will constitute such neglect will depend 
upon the circumstances of the particular case. But it 
is well settled that the mere fact that the body of the 
check is in a handwriting different from that in which 
the checks of the depositor are usually filled up will not 
be such a suspicious circumstance as will charge the 
bank with being at fault. 2 In the case of Redington v. 
Woods, it was said by Crockett, J. : ' ' The mere fact that 
the body of the check was in a different handwriting 
from that usually employed was not of itself sufficient 
to raise the slightest suspicion of fraud. The practice 
is so common in all commercial communities of causing 
checks of the same drawer to be filled up in different 
handwritings, that it is not to be presumed the attention 
of the drawee will be particularly called to the hand- 
writing in the body of the paper. It is the signature 
which verifies the instrument, and not the writing in 
the body of it, and if the signature be genuine and the 
writing in the body of the paper in the usual form, 
though in a different handwriting from that usually 
employed, there will be nothing in the latter circum- 
stance to excite the slightest suspicion of fraud. ' ■ 

Within What Time Bank Must Give Notice 
and Demand Restitution. — The bank has a reason- 
able time within which to detect the forgery and demand 



1 See cases cited in note 3, page 62. 

2 Redington v. Woods, 45 Cal., 406. 



64 PRATTS* MANUAL OF BANKING LAW. 

restitution. What will be such a reasonable time will 
depend greatly on the circumstances of each particular 
case. If no negligence is attributable to the bank in 
failing to make the discovery, it will ordinarily be suffi- 
cient if notice is given to the holder as soon as the 
forgery is known. 1 In several cases recovery has been 
allowed where there was a dela}^ of some weeks and even 
months. 2 The earlier English cases, which hold that 
there can be no recovery unless the payor gives notice on 
the very day of payment and before any change of circum- 
stances, have not been followed in this country. In the 
case of the Canal Bank v. Bank of Albany it was said 
by Justice Cowen : ' ' But I am not willing to concede 
that delay in the abstract, as seems to be supposed, can 
deprive the party of his remedy to recover back money 
paid under the circumstances before us. It is said that 
the defendants had indorsers behind them, and by delay 
they were prevented from charging them by giving 
reasonable notice. Admit this to be so. The plaint- 
iffs did not stand in the relation of a holder. They 
were the drawees, and advanced the money by way of 
payment. They would never, therefore, think of notice 
to defendants till they accidentally discovered the for- 
gery. If there had been any unreasonable delay after 
such discovery another question would be presented. ' ' 

In that case the payment had been made by the 
Canal Bank on a forged indorsement on the 28th of 
March, and it was not until the 7th of the following 

1 Canal Bank v. Bank of Albany, 1 Hill, 287; Third Nat'l Bank 
v. Allen, 39 Mo., 310. 

2 Canal Bank v. Bank of Albany, supra; Rouvaut v. San Antonio 
Nat'l Bank, 63 Tex., 610. 



CERTIFICATION OF CHECKS. 65 

June that the Bank of Albany was notified of the 
forgery and called upon to refund the money. Still it 
was held that there could be a recovery. 



CHAPTER XI. 



CERTIFICATION OF CHECKS. 

The Obligation Assumed By the Bank. — By 

certifying a check the bank obligates itself to retain the 
amount for which the check is drawn (and which by 
the certificate it admits it has on hand to the drawer's 
credit) to meet the check when presented, and to pay 
the amount to the holder on demand. 1 If written out, 
the certificate would contain a statement that the drawer 
has funds sufficient to meet it in the bank applicable to 
its payment, and an agreement on behalf of the bank 
that these funds shall be retained and paid upon the 
check whenever it is presented. 2 The theory of the law 
is that the bank at the time it gives the certificate actu- 
ally has funds of the drawer to that amount applicable 
to the purpose ; and any person taking such a certifi- 
cate in good faith has the right to presume that such is 
the fact, and the bank cannot be heard to allege the 
contrary. 3 

Effect of Certification. — When it has certified a 
check the bank becomes at once primarily liable for its 

1 Merchants' Bank v. State Bank, 10 Wall., 648 ; Cooke v. State 
Nat'l Bank, 52 N. Y., 96 ; Fanners' and Mechanics' Bank v. 
Butchers' and Drovers' Bank, 16 N. Y., 125. 

2 Per Church, C. J., in Cooke v. State Nat'l Bank, supra. 

3 See cases cited in note 1. 



66 PRATTS' MANUAL OF BANKING LAW. 

payment. In contemplation of law the amount thereof 
is immediately charged to the account of the drawer, 
and as to him the effect is the same as if the bank had 
paid the money upon the check: The bank, therefore, 
ceases to be indebted to the depositor as to the amount 
specified in the instrument, and such amount thenceforth 
passes to the credit of the holder, and is specifically ap- 
propriated to pay the check when presented. And even 
if the instrument should come back into the hands of 
the depositor, he could claim the amount, not by virtue 
of his original deposit, but solely by virtue of his right 
as holder. 1 

A case decided a few years since in the Supreme 
Court of Alabama affords an excellent illustration of 
the effect of certifying a check. P deposited with 
Miller & Co. , his bankers, a check drawn upon another 
bank in his favor, which was placed to his account and 
entered on his pass-book. During the same day Miller 
& Co. sent the check to the drawee bank, and had it 
certified. Afterward, on the same day, they were 
served with process of garnishment in a suit by a cred- 
itor of P's, and still later in the day P notified them not 
to present the check for payment, and demanded its 
return. The question was whether the amount of the 
check, at the time of the service of garnishment, was a 
legal demand due by Miller & Co., the garnishees, to 
the depositor, which the latter could enforce in his own 
name in an action at law. The decision was put upon 
the sole ground of the effect of the certification, which 

1 First Nat'l Bank v. Leach, 52 N. Y., 350; Girard Bank v. 
Bank of Penn Township, 39 Penn. St., 92 ; Essex County Nat'l 
Bank v. Bank of Montreal, 7 Bissell, 197; Nat'l Commercial 
Bank v. Miller, 77 Ala., 168. 



CERTIFICATION OF CHECKS. 67 

was held to have established at once the relation of 
debtor and creditor as to that amount between Miller & 
Co. and the depositor. The court said : ' ' When the 
check was certified, it ceased to possess the character 
or perform the functions of a check, and represented so 
much money on deposit, payable to the holder on de- 
mand. The check became a basis of credit — an easy 
mode of passing money from hand to hand, and answer- 
ing the purposes of money. The garnishees, by accept- 
ing a certification of the check, made it their own, and 
the relation of debtor and creditor was created between 
them and the defendant. ' ' x 

What Officer May Certify. — It is well settled that 
the cashier has virtute officii the power to certify checks. 2 
And in New York there are judicial dicta to the effect 
that this power also belongs to the office of the paying- 
teller. 3 In the important case of Farmers' and Me- 
chanics' Bank v. Butchers' and Drovers' Bank, it was 
said by Selden, J. : ' ' The act of certifying a check is 
simply answering the supposed inquiry, of one about 
to take the check, whether the bank has funds of the 
drawer to meet it ; and no other officer or agent of the 
bank would seem to be so competent to give the answer 
as the paying-teller. His duties impose upon him the 
duty of knowing the state of every depositor's account. 
He is charged with all he pays out, and, if he pays a 
check without funds in hand, he is responsible to the 

1 Nat'l Commercial Bank v. Miller, 77 Ala.> 168. 

2 Merchants' Bank v. State Bank, 10 Wall., 666 ; Cooke v. State 
Nat'l Bank, 52 N. Y., 96. 

3 Farmers' and Merchants' Bank v. Butchers' and Drovers' 
Bank, 16 N. Y., 125, per Selden, J. ; Irving Bank v. Wetherald, 
36 N. Y., 335, per Hunt, J. 



68 PRATTS' MANUAL OF BANKING LAW. 

bank for the amount. His knowledge exceeds that of 
the book-keeper, because, to the information obtained 
from the latter, he adds a knowledge whether any de- 
posits have been made or checks paid since the last 
entry in the books. No doubt the cashier, by virtue of 
his general powers and his presumed knowledge of all 
the affairs of the bank, would be competent to answer 
the question ; but he could only do so by first inquiring 
of the book-keeper and teller. Why should the appli- 
cant be compelled to seek the information through this 
circuitous channel, instead of going directly to the ulti- 
mate source of knowledge on the subject? The teller 
is put in the place of the cashier, to perform a portion 
of his duties. His appointment is virtually a division 
of the office of cashier ; and that branch of the office 
which the teller fills embraces those duties which par- 
ticularly require a knowledge of the state of the accounts 
of the depositors. Why, then, should he not be the 
organ of communication on that subject?" 

But it has been expressly held in Massachusetts that 
this power is not inherent in the office of the paying- 
teller; and, moreover, that such a power cannot be 
shown to exist by evidence of a general usage among 
banks for paying-tellers to certify checks, such a usage 
being considered bad, for the reason that it is in effect 
a power to pledge the credit of the bank. 1 It should be 

1 Mussey v. Eagle Bank, 9 Mete, 313. 

In a late case in Pennsylvania an effort was made to show a 
general usage for assistant tellers to certify checks, but the evi- 
dence failed to establish any such usage. And Paxson, J. , said : 
"It is, moreover, a grave question whether such a usage is not 
essentially bad, for the reason that it is in effect a power to pledge 
the credit of the bank to its customers. ' ' Hill v. Union Trust 
Company, 108 Penn. St., 1. But as the point was not involved in 
the decision of the case, this observation is merely 3. dictum. 



CERTIFICATION OF CHKCKS. 69 

stated, however, that this case was decided more than 
forty years ago, before certified checks had come into 
such general use, and that the line of reasoning adopted 
in the opinion of Wilde, J. , has not been followed in any 
subsequent case. 1 

But whether the power is inherent in the office or 
not, the bank will be bound by the certificate of the 
paying-teller, either where the authority has been ex- 
pressly conferred upon him by the directors or where it 
has been his custom to certify checks with the knowl- 
edge and acquiescence of the directors or managing 
officers. 2 

It has been decided in New York that the power to 
certify checks is not inherent in the office of assistant 
cashier, and that any person taking a check certified by 
such an officer takes it at the risk of showing that he 
had the requisite authority, or that the bank, by reason 
of the action of its directors or managing officers, in 
permitting him to give certificates of this kind is 
estopped from denying his authority. 3 

Officer Cannot Certify His Own Check. — It is a 

general rule of law that the powers conferred upon an 
agent are to be used for the exclusive benefit of the 
principal, and that the agent cannot bind his principal 
in any matter in which he is an interested party on the 
opposite side ; and upon these grounds it is held that 
a bank officer authorized to certify checks cannot bind 

1 Merchants' Bank v. State Bank, 10 Wall., 666 ; Cooke v. State 
Nat'l Bank, 52 N. Y., 96 ; Hill v. Union Trust Company, 108 Penn. 
St., 1. 

2 Farmers' and Merchants' Bank v. Butchers' and Drovers' 
Bank, 16 N. Y., 125. 

3 Pope v. Bank of Albion, 57 N. Y., 126. 



70 PRATTS* MANUAt OF BANKING UW. 

the bank by the certification of his own check. 1 And 
no person taking the check of an officer certified by 
that officer himself can acquire the rights of a bona fide 
holder ; for the instrument itself bears evidence, and 
conveys notice, that the certification was improper. 2 

Certification Without Funds. — No officer of the 
bank has any implied authority to certify a check, un- 
less the depositor has funds on deposit to the amount 
named therein. But if an officer authorized to certify 
does give such a certificate in violation of his duty, the 
bank will be liable thereon to a bona fide holder. The 
liability of the bank in such case is not based upon any 
power of its certifying officer to bind it by such a con- 
tract without funds, but upon the ground that the bank 
is estopped from disputing his representation that there 
are funds. 3 

When Bank May Recall Certificate Made by 
Mistake. — When a bank has certified an instrument 
by mistake, it may recall such certificate if the error has 
not been the cause of loss or injury to the other party. 4 
Where the certificate of the paying-teller that a note 
payable at the bank was good was discovered later in 
the day to have been a mistake, and the note was re- 
turned to the presenting bank in sufficient time to have 
enabled it to make another presentment and give notice 
to the indorsers, it was held that the error could be cor- 

1 Claflin v. Farmers' and Citizens' Bank, 25 N. Y., 293. 

2 /tf. 

3 Merchants' Bank v. State Bank, 10 Wall., 604; Farmers' and 
Mechanics' Bank v. Butchers' and Drovers' Bank, 16 N. Y., 125 ; 
Cooke v. Nat'l State Bank, 52 N. Y, 96. 

4 Second Nat'l Bank v. Western Nat'l Bank, 51 Md., 128. See 
also Irving Bank v. Wetherald, 36 N. Y., 335. 



CERTIFICATION OF CHECKS. 7 1 

rected. 1 "There can be no such rule of law as would 
make a memorandum of this description irrevocable the 
moment it is placed upon the note. If put there in 
error, like any other error or mistake it may be cor- 
rected before rights and liabilities have been incurred or 
losses sustained in consequence of it. " 2 

May Recover Money Paid on Check Raised 
After Certification. — And where a bank has paid a 
check raised after certification, it may recover the 
amount, unless in the mean time the position of the other 
party has been changed so that it would be unjust to 
require him to refund. 3 

Certified Check not Outlawed by Delay in Pre- 
senting. — The holder of a certified check is regarded 
by the courts as standing on the footing of an ordinary 
depositor, and, therefore, the instrument is not out- 
lawed by delay to make demand of payment. 4 In a 
leading case on this point it was said : ' ' Such a deposit 
stands expressly upon the same ground as any other. 
The bank, instead of being prejudiced, is benefited by 
the delay of the owner in calling for its payment, and 

1 Second Nat'l Bank v. Western Natl Bank, 51 Md., 128. 

2 Id. , per Brent, J. In this case an offer was made to show a 
usage that a certification made in error could not be revoked at 
all. But the evidence was rejected upon the ground that any 
such usage would be unreasonable and repugnant to the well- 
settled rule of law. 

3 Nat'l Bank of Commerce v. Nat'l Mechanics' Banking Asso- 
ciation, 55 N. Y., 2ii. 

4 Girard Bank v. Bank of Penn Township, 39 Penn. St., 92 ; 
Willets v. The Phoenix Bank, 2 Duer, 121 ; Farmers' and Me- 
chanics' Bank v. Butchers' and Drovers' Bank, 4 Id., 219 ; 16 
N. Y., 125. 



72 PRATTs' MANUAL OF BANKING tAW. 

can with no more propriety impute laches to the un- 
known holder of the check than to the known holder of 
an ordinary deposit." 1 In Girard Bank v. Bank of 
Penn Township, the leading case on this point, the 
check was outstanding for nearly seven years ; but it 
was held that this delay did not bar a recovery. The 
statute of limitations does not begin to run from the 
date of the check or the date of its certification, but 
from the time that payment is demanded and refused. 2 

Verbal Acceptances. — It is a rule of commercial 
law that if one promises to accept a bill, and another 
person takes such bill upon the faith of that promise, 
this will operate as a virtual acceptance ; and this rule 
applies where a bank promises to pay checks drawn 
upon it. 3 But in order that the person taking such 
check may hold the bank for the amount, he must show 
that the promise of the bank was communicated to 
him ; for otherwise it would be quite clear that he had 
not acted upon the faith of the promise, and there 
would be no privity between him and the bank. 4 
Whether in any particular case such a promise amounts 
to a technical acceptance is not a matter of much prac- 
tical importance, for, if a recovery cannot be had upon 
the check as an accepted check, it may be had in an 
action founded upon a breach of the promise to accept. 5 



1 Willets v. The Phoenix Bank, 2 Duer, 121, per Oakley, C. J. 

2 Girard Bank v. Bank of Penn Township, 39 Penn. St., 92. 
3 Nelson v. First Nat'l Bank, 48 111., 36. 

4 Nelson v. First Nat'l Bank, supra ; First Nat'l Bank v. Pettel, 
41 111., 492 ; Carr v. Nat'l Security Bank, 107 Mass., 48. 

5 Nelson v. First Nat'l Bank, supra; Boyce v. Edwards, 4 
Peters, 122. 



CERTIFICATION OF CHECKS. 73 

Not Essential that Check Should be in Ex- 
istence. — It is not essential that the check should be 
in existence at the time the promise is made ; a prom- 
ise to pay a non-existing check will be equally binding 
upon the bank, if such check is described with sufficient 
certainty, so that there may be no mistake as to the 
instrument to which the promise is to apply. 1 Nor is 
it required that the check should be described by giving 
the name of the payee, the amount, etc. , but it will be 
enough to specify generally checks drawn for a special 
purpose or in a particular transaction, when there can 
be no doubt what checks were intended. 2 Thus, where 
a bank agreed to pay checks of A to the value of a 
certain cargo of corn (without specifying any particular 
check), it was held that a check given by A in the pur- 
chase of the corn was covered by the agreement. 3 

Promise may be Merely Verbal. — At common 
law an acceptance of a check need not be in writing, 
but may be merely verbal. But in England, and in 
many of the States of the United States, there are 
statutes to the effect that no person shall be charged as 
an acceptor of a bill of exchange unless his acceptance 
shall be in writing ; * and a check is a bill of exchange 
within the meaning of such statutes. 5 In those States 

kelson v. First Nat'l Bank, 48 111., 36. 

3 Id. 

4 Statutes of this kind have been adopted in Alabama, Arkan- 
sas, Arizona, California, Dakota, Georgia, Idaho, Kansas, Maine, 
Michigan, Minnesota, Mississippi, Nevada, New York, Oregon, 
Pennsylvania, Washington, and Wisconsin. 

5 Duncan v. Berlin, 60 N. Y., 151 ; Risley v. Phoenix Bank, 83 
N. Y, 318. 



74 PRATTS' MANUAL OP BANKING LAW. 

in which the common-law rule prevails, the bank may- 
be bound by a mere verbal promise to pay. 1 But if the 
drawer has no funds on deposit, and this fact is known 
to the person with whom the engagement is made, then 
a mere verbal promise would be ineffectual to bind the 
bank ; for in such case the promise is to pay the debt 
of another, and is within the statute of frauds. 2 

Certification o* Forged and Altered Instruments. 

By analogy to the rules which govern the acceptance 
of bills and the payment of checks, it has been held that 
a bank, in certifying a check, asserts that the signature 
of the drawer is genuine, but not that the instrument is 
genuine in any other respect. 3 If the signature is forged, 
the bank will not be permitted to question the genuine- 
ness of the instrument, for this would be contradicting 
its own assertion that the signature is genuine. But 
where the forgery is in the body of the instrument, as 
where the amount has been raised or the name of the 
payee changed, then, as the bank has not asserted that 
the instrument is genuine in these respects, it will not 
be estopped from showing the fact of the alteration. 4 
The question whether a bank certifying a check, which 
has been raised before the certification, would be liable 
to the holder for the full amount came before the New 
York Court of Appeals in 1874, and, because of its great 
importance to the commercial community, received very 
full and elaborate consideration. After a judgment had 

1 Nelson v. First Nat'l Bank, 48 111., 36. 

2 Morse v. Mass. Nat'l Bank, 1 Holmes, 209. 

3 Marine Nat'l Bank v. Nat'l City Bank, 59 N. Y., 67 ; Security 
Bank v. Nat'l Bank of the Republic, 67 N. Y., 458. 

4 See cases cited in preceding note. 



CERTIFICATION OF CHECKS. 75 

been reached by a full court that the bank would not 
be so liable, a motion was made for a reargument, 
founded upon the affidavits of a number of business men 
of New York City, as to the meaning which the certifi- 
cation of a check was understood to have by the busi- 
ness community. But it was found that these affidavits 
did not show ' ' any custom or usage, either general or 
particular, by which any meaning or interpretation has 
been given to the words used in the certifying of checks 
by the bank on which they are drawn, or effect to the 
act of certification, other than that which the language 
used in the ordinary and popular sense would imply. ' ' 
And the court further observed that there was no pre- 
tense that the enlarged liability sought to be fixed upon 
a bank certifying a check had ever been recognized or 
acted upon, and that no such practical interpretation 
had ever been put upon a certification. 

On account of the importance of this decision to busi- 
ness men and bankers we may be permitted to quote 
somewhat at length from the opinion of the court, so as 
to show the reasons (which are set forth with admirable 
clearness and perspicuity) that led the court to its con- 
clusion. Among other things it was said : ' ' As a 
promissory obligation, courts have given the certifica- 
tion of a check the same effect as the acceptance of a 
bill of exchange by the drawee. They have also, 
adapting the well-settled rules of law to this particular 
and very convenient mode of transacting business, re- 
garded the act of certifying a check as, for some pur- 
poses, the equivalent of a payment to the person pre- 
senting it and claiming to be the holder, and have held 
that, when a payment actually made could be recovered 
back as made by mistake, there was no liability by 



J 6 PRATTS* MANUAL OF BANKING LAW. 

reason of the certificate that could be enforced by law. 
To hold that the act of certifying a check is an act of 
graver import, involving greater responsibilities than 
the acceptance of a bill of exchange or the actual pay- 
ment of the same check, would be a violation of all the 
analogies of the law, and unreasonable. Whether it 
should be the duty of the person taking a check, and 
who knows or may know the individual with whom he 
deals, and may easily trace the title and ascertain the 
genuineness of the check in all its parts, or the bank 
to whom it is presented in the hurry of business, and, 
perhaps, by a stranger wholly unknown or an irrespon- 
sible messenger, for certification upon the instant and 
without opportunity for inquiry, to ascertain all the 
extrinsic facts which are now claimed to be implied and 
warranted by the act of certification may not be for us 
to determine. But to us it seemed more reasonable 
that that duty should rest upon the one receiving the 
check. It is believed that banks do not always demand 
identification or proof of title in the person presenting 
the check for certification ; and if they merely certify 
to the genuineness of the signature of the drawer and 
the sufficiency of the fund, the other matters can safely 
be left until payment is demanded. But upon the 
theory of the defendant's counsel a bank must ascertain 
to a certainty, before certifying, that the check has not 
been altered or tampered with, and that the indorse- 
ments are genuine — that is, that the check is genuine in 
all its parts, and that the apparent holder has a valid 
title. It is evident that to cast all this responsibility 
upon the certifying bank would put a stop to the certi- 
fying of checks, except when presented by the drawer or " 
under very peculiar circumstances. ' ' 



CERTIFICATION OF CHECKS. 77 

After having shown that the only facts which the 
bank could be presumed to know were the signature of 
the drawer and the state of his account, the court pro- 
ceeded : ' ' It is only assertions of facts within the 
knowledge or which may reasonably be presumed to 
be within the knowledge of the party making them 
that imposes an obligation, and for the truth of which 
the law holds him legally responsible. An inquiry 
may reasonably and properly be made of the drawee of 
the check as to the genuineness of the signature of the 
drawer and the state of his account, but a resort would 
be had to other sources of information to learn the con- 
sideration of the check, by whom the body was written, 
the genuineness of the indorsement, and the title of the 
payee. As to such matters the drawee could not be 
supposed, ordinarily, to have any information and would 
not be called upon or expected to give answer in respect 
to them ; hence, in all reason, as well as legally, the 
inquiring of a drawee in respect to a check and the re- 
sponse, whether verbally or in writing, that it is ' good ' 
must be held, in the absence of circumstances indicating 
a wider reach of inquiry and a broader answer, to relate 
to those facts, and those only, of which the drawee is 
presumed to have knowledge, viz., the two facts before 
mentioned. ' ' 

But these views of the New York court have not 
been universally accepted. In a case which arose in 
New Orleans between the Louisiana National Bank and 
the Citizens' Bank it was held by the Supreme Court of 
Louisiana that the certification estops the bank from 
questioning the amount as against a bona fide holder 
who takes the check upon the faith of the certification. 1 

Louisiana Nat'l Bank v. Citizens' Bank, 28 I^a. Ann., 189. 



78 PRATTS' MANUAL OF BANKING LAW. 

This case was decided in 1876, which was subsequent 
to the decision in Marine National Bank v. National 
City Bank. 1 The doctrine of the latter case was not 
dissented from, but a distinction was taken between the 
two cases from the circumstance that in the New York 
case the party who had the check certified was the 
same whose name was in the check as payee, whereas 
in the case between the New Orleans banks the holder 
was not a party to the check. The New York court 
has not, however, put its decisions upon any distinction 
between the rights of one whose name has been wrong- 
fully inserted in the check and one who has taken it by 
transfer from the payee, but all of its decisions on the 
point have been put upon the broad ground that the 
bank cannot be presumed to warrant the genuineness of 
the body of the instrument. 2 And, indeed, it is not 
seen how any substantial distinction could be taken be- 
tween the two cases, if in neither case there has been any 
negligence or bad faith. 

Showing Meaning of Contract by Custom and 
Usage. — The case of Marine National Bank v. National 
City Bank having settled for the State of New York 
the extent and meaning of the obligation which the 
certifying bank incurs, evidence is no logger admissible 
in that State to show that by the usage or custom of 
merchants and bankers the contract of certification has 
a larger scope and meaning than that which the courts 



J 59N. Y., 67. 

2 Marine Nat'l Bank v. Nat'l City Bank, 59 N. Y., 67 ; Security 
Bank v. Nat'l Bank of the Republic, 67 N. Y., 458; Clews z\ 
Bank of New York Nat'l Banking Association, 89 N. Y., 418. 



CERTIFICATION OF CHECKS. 79 

have given to it ; x but in other States, where the ques- 
tion is an open one, evidence of the common under- 
standing as to the obligation which the bank assumes 
would be properly admitted, and, if it could be shown 
that in any community there is an established usage or 
custom to import to the bank an obligation to pay the 
amount stated in the instrument, notwithstanding the 
body of the check was forged, the courts would be 
bound, by well-established legal principles, to adopt this 
as the rule of law. 

Assurance of Officer that Instrument is Gen- 
uine in All Particulars does not Bind Bank. — As 

the bank is presumed to have the means of knowing 
but the two facts, viz., that the signature of the drawer 
is genuine and that he has funds on deposit sufficient 
to meet the check, it will not be bound by the repre- 
sentation of its certifying officer that the instrument is 
genuine in other particulars. 2 D. & T., gold brokers, 
were tendered a check by a stranger in payment for 
gold, but before accepting it as payment one of the 
firm took it to the bank on which it was drawn and 
told the teller that he did not like the looks of the mes- 
senger who brought the check to them, and who was a 
total stranger, and that he wished the teller to be very 
particular before certifying the check; that he had 
doubts about it, and he wanted to be assured that the 
check was genuine in every particular. The teller ex- 
amined it, certified it, and when he handed it back said, 
"You need not have the slightest doubt about that 

Security Bank v. Nat'l Bank of the Republic, 67 N. Y., 458. 
2 Security Bank v. Nat'l Bank of the Republic, supra; Clews 
v. Bank of New York Nat'l Banking Association, 89 N. Y., 418. 



80 PRATTS' MANUAL OF BANKING LAW. 

check ; it is correct in every particular ; the drawer is a 
director of this bank. ' ' It afterward turned out that 
the check had been altered in the date, the name of the 
payee, and the amount, which had been raised from 
$24.16 to $4,222.75. The bank upon which the check 
was drawn, having paid it, brought an action to recover 
as for money paid by a mistake. 

The court held that there could be a recovery, and 
that the representation of the teller did not work an 
estoppel. Andrews, J., writing the opinion, said: 
1 ' There is no ground for claiming that the plaintiff was 
estopped from showing the body of the check to be a 
forgery by the verbal assurance of the teller to the 
payee of the check that it was correct in every partic- 
ular. It was no part of the teller's duty to give an 
assurance as to the genuineness of the check, except in 
respect to the signature of the drawers. If he went 
beyond this, his representation did not bind the bank. 
Moreover, if the reply made to the question put to him 
was intended as an affirmation of the genuineness of 
the body of the check, it was simply an expression of 
his opinion, and must have been so understood by the 
person who made the inquiry. ' ' x 



CHAPTER XII. 



THE BANK-BOOK OR PASS-BOOK. 

It is customary with every bank to furnish each of its 
depositors with a small pass-book, called also a. bank- 
security Bank v. Nat'l Bank of the Republic, 67 N. Y., 458. 



THE BANK-BOOK OR PASS-BOOK. 8 1 

book, in which is entered, on the debtor side, the date 
and amount of each deposit, generally at the time the 
deposit is made ; and at regular or irregular intervals 
this pass-book is sent into the bank, and all payments 
made for the depositor are entered upon the other side 
of the account, and the balance is struck ; after which 
the book is returned to the depositor, together with his 
checks and other vouchers. The writing up of the bank- 
book and returning it to the depositor is the statement 
of an account by the bank ; and by retaining it, after a 
reasonable time for the examination of it has elapsed, 
without objection, the customer is deemed to acquiesce 
in it, and to admit it to be correct, and is equally bound 
by it as an account stated. 1 But this account is only 
prima facie, and not conclusive, evidence of the dealings 
between the parties. 2 Iyike any other account it may be 
impeached for fraud or mistake. If the depositor is 
credited with a greater amount than he has in fact de- 
posited, the bank is not precluded from showing that 
fact by any competent evidence. 3 And, on the other 
hand, the depositor, after he has accepted the account 
as correct, may show that there has been an error, un- 
less his acquiescence has led the bank into a belief of a 
certain state of facts to its prejudice. 4 Touching this 
subject, Justice Hunt, in delivering the opinion of the 

1 Weisserz>. Denison, 10 N. Y., 68; Hardy v. Chesapeake Nat' 1 
Bank, 51 Md., 562. 

2 First Nat'l Bank v. Whitman, 94 U. S., 343 ; Weisser v. Den- 
ison, supra; Welsh v. German American Bank, 73 N. Y., 424, 
Frank v. Chemical Nat'l Bank, 84 N. Y., 209 ; Hardy v. Chesa- 
peake Nat'l Bank, supra; Manufacturers' Nat'l Bank v. Barnes, 
65 111., 69 ; Nat'l Bank v. Tappan, 6 Kans., 456. 

3 Commercial Bank v. Rhind, 3 Macq. H. h. Cas., 643. 

4 See cases cited in note 2. 



82 PRATTS' MANUAL OF BANKING LAW. 

Supreme Court of the United States in the case of First 
National Bank v. Whitman, said: "Mistakes in bank 
accounts are not uncommon. They occur both by un- 
authorized or pretended payments, as well as by the 
omission to give credit for money deposited. When 
discovered, the mistake must be rectified, and an ordi- 
nary wri ting-up of a bank-book, with a return of vouchers 
or a statement of accounts, precludes no one from ascer- 
taining the truth and claiming its benefit. ' ' 

Duty of Depositor to Examine Bank-Book. — As 

to the duty of the depositor in respect to examining 
his pass-book and reporting any mistake to the bank, 
it is such as that which prudent men usually bestow 
on the examination of such accounts ; but, in ordinary 
cases, not more than this. 1 On this point the Supreme 
Court of the United States has said in a recent case : 2 ' ' It 
is within common knowledge that the object of a pass- 
book is to inform the depositor from time to time of the 
condition of his account as it appears upon the books of 
the bank. It not only enables him to discover errors 
to his prejudice, but supplies evidence in his favor in 
the event of litigation or dispute with the bank. In 
this way it operates to protect him against the careless- 
ness or fraud of the bank. The sending of his pass- 
book to be written up and returned with the vouchers 
is, therefore, in effect a demand to know what the bank 
claims to be the state of his account. And the return 
of the book, with the vouchers, is the answer to that 

1 Leather Manufacturers' Bank v. Morgan, 117 U. S., 96; Frank 
V. Chemical Nat'l Bank, 84 N. Y., 209 ; Hardy v. Chesapeake 
Nat'l Bank, 51 Md., 562. 

2 Leather Manufacturers' Bank v. Morgan, supra. 



THK BANK-BOOK OR PASS-BOOK. 83 

demand, and, in effect, imports a request by the bank 
that the depositor will, in proper time, examine the 
account so rendered and either sanction or repudiate 
it. In Devaynes v. Noble, i Meriv., 530, 535, it appears 
that the course of dealing between bank and customer, 
in London, was the subject of inquiry in the High Court 
of Chancery as early as 18 15. The report of the master 
stated, among other things, ' ' that for the purpose of hav- 
ing the pass-book ' made up by the bankers from their 
own books of account, the customer returns it to them 
from time to time as he thinks fit; and, the proper 
entries being made by them up to the day on which it 
is left for that purpose, they deliver it again to the 
customer, who thereupon examines it, and, if there ap- 
pears any error or omission, brings or sends it back to 
be rectified; or, if not, his silence is regarded as an 
admission that the entries are correct. ' This report is 
quite as applicable to the existing usages of this coun- 
try as it was to the usages of business in I^ondon at the 
time it was made. The depositor cannot, therefore, 
without injustice to the bank, omit all examination of 
his account, when thus rendered at his request. His 
failure to make it, or to have it made, within a reason- 
able time after opportunity given for that purpose, is 
inconsistent with the object for which he obtains and 
uses a pass-book. * * * In their relation with 
depositors, banks are held, as they ought to be, to a 
rigid responsibility ; but the principles governing those 
relations ought not to be extended so as to invite or 
encourage such negligence by depositors in the examina- 
tion of their bank accounts as is inconsistent with the 
relation of the parties or with those established rules 
and usages, outlined by business men of ordinary pru- 



84 PRATTS' MANUAL OF BANKING I,AW. 

dence and sagacity, which are, or ought to be, known to 
depositors. ' ' 

Depositor may be Estopped to Question Ac- 
count. — Such being the duty of the depositor, if his neg- 
lect to make an examination within a reasonable time 
leads the bank to believe that the account is acquiesced 
in and approved, and for that reason to omit to take steps 
for its protection which it could and would have taken 
had it been given notice that the account was incorrect, 
this will estop the customer from afterward questioning 
the correctness of the account. Thus, if the bank has 
paid altered or forged checks, and charged them to the 
customer upon his pass-book, the fact that the customer 
has neglected to make an examination of the account and 
vouchers, and notify the bank of the forgeries or altera- 
tions, may preclude him from afterward disputing these 
debits. 1 

But if the bank has not taken any action, or lost any 
rights in consequence of the depositor's silence, the only 
effect would be that the burden of proof is shifted onto 
him, and, instead of the bank being obliged to show that 
the account is correct, he is bound to show the mistake. 
Nor would anything more than this be the effect when 
it is clear that an examination of the pass-book and 
vouchers would not have disclosed the error or the 
fraud. 2 

Examinations by Clerk or Agent. — The examina- 
tion may be made by an agent or clerk of the depositor ; 
and if such agent or clerk makes the examination in 

1 Leather Manufacturers' Bank v. Morgan, 127 U. S., 96. 

2 Frank v. Chemical Nat'l Bank, 84 N. Y., 209. 



?H£ CIvEARING-HOUSK. 85 

good faith, and with ordinary diligence, and gives due 
notice of any error found in the account, the duty of 
the depositor to the bank is discharged. 1 

But where the person employed in this matter is 
guilty of defrauding the bank, then, it would seem, the 
depositor is in no better position than if no examination 
had been made at all — unless he can show that he 
exercised reasonable diligence in supervising the con- 
duct of such person in respect to this duty. 2 



CHAPTER XIII. 



THE CLEARING-HOUSE. 

In the larger cities the daily balances between the 
banks in the place are settled through the clearing- 
house. This institution is merely an association of all, 
or the more important, banks of the city for the pur- 
pose of settling their balances at one place and time, 
and thus avoiding the labor and delay of a separate 
settlement by each bank with every other. In brief, 
the practice is for each bank at a certain hour of each 
bank-day to send to the clearing-house the demands it 
has received against all the other banks since the last 
clearing, making them up in a separate bundle for each 
bank, with a ticket containing the items and aggregate 
of each bundle. Each bank receives a credit for the 
demands it has sent in against the other banks, and is 
charged with the demands which the other banks have 
sent in against it, and the balance is then struck and 

1 Leather Manufacturers' Bank v. Morgan, 127 U. S., 96. 
Ud 



86 PRATTS* MANUAL 0^ BANKING UW. 

settlement made accordingly. Mistakes made because 
any demands are not good are not usually adjusted 
through the clearing-house, but directly between the 
banks which are parties to them. 1 

Third Parties not Affected by Rules of the 
Clearing-House. — The rules and usages of the clear- 
ing-house, if not in conflict with law, are, of course, 
binding upon the banks which are members thereof, in 
the same way that a general usage in trade binds those 
who deal with reference to it. But these rules and 
usages are designed to operate strictly among the mem- 
bers for their own convenience in the dispatch of busi- 
ness, and the customers of a bank are not in a situation 
to claim the benefit of them, nor, on the other hand, to 
be injuriously affected by them. 2 And the fact that a 
bank which is a member of the clearing-house is acting 
as the agent of its customer will not bring the case 
within the operation of the rule that the principal is 
entitled to the benefit of the contract of the agent 
while transacting the business of the principal ; for the 
rules of the clearing-house are a mere labor-saving 
arrangement, designed for the exclusive benefit of the 
agent. 3 Therefore, the indorsers of a promissory note 

1 For a statement of the course of business in the various clear- 
ing-house associations see the following cases : Merchants' Nat'l 
Bank v. Nat'l Bagle Bank, ioi Mass., 281; Overman v. Hoboken 
City Bank, 30 N. J. Law, 61 ; Stuyvesant Bank,z\ Nat'l Mechan- 
ics' Banking Association, 7 Lansing, 197 ; Bloffer v. Louisiana 
Nat'l Bank, 35 La. Ann., 251 ; Preston v. Canadian Bank, 23 Fed. 
Rep., 179; Dutton v. Merchants' Nat'l Bank, 16 Phil., 94. 

2 Overman v. Hoboken City Bank, supra; Stuyvesant Bank v. 
Nat'l Mechanics' Banking Association, supra. 



TH£ CLEARING-HOUSE. 87 

sent through the clearing-house to the bank at which it 
is payable cannot set up any rule of the clearing-house, 
by way of forfeiture or estoppel, to defeat the right of 
the bank which has discounted the note to recover 
against them. 1 So, the rule of the clearing-house, that 
checks not good are to be returned before a certain 
hour, cannot be set up by the payee of a check, who is 
not a member of the association, in order to charge the 
bank upon which the check is drawn with liability for 
the amount. 2 And where a bank which does not be- 
long to the association employs a bank which is a 
member to clear for it, the former bank can have no 
cause of action against another member based upon a 
failure of such member to conform to the rules of the 
association. 3 

Effect of Clearing-House Rule that Checks not 
Good are to be Returned by a Certain Hour. — All 

clearing-houses have a rule that checks not good are to 
be returned by the banks receiving the same to the 
banks from which they were received by or before a 
certain hour of the same or the following day. The 
interpretation of this rule is a matter of great practical 
importance to the banks which are members of a clear- 
ing-house. Can a bank be required to receive back a 
check returned to it after the hour fixed ? Or, if the 
bank upon which the check is drawn should fail to 
make the return within the time allowed by the rule, 
would it lose entirely its right to do so ? The question 



1 Manufacturers' Nat'l Bank v. Thompson, 129 Mass., 438. 

2 Overman v. Hoboken City Bank, 30 N. J. Law, 61. 
3 Stuyvesant Bank v. Nat'l Mechanics' Banking Association, 

7 Lansing, 197. 



SS BRAIDS* MANUAL Otf BANKING I.AW. 

has been before the Supreme Court of Massachusetts in 
several cases. The rule of the Boston clearing-house 
is that ' ' whenever checks are sent through the clearing- 
house which are not good, they shall be returned by the 
banks receiving the same to the banks from which they 
were received as soon as it shall be found that said 
checks are not good ; and in no case shall they be re- 
tained after one o'clock." The Massachusetts court 
has uniformly held that this rule does not so operate 
that a failure to return the check before the time named 
will work an absolute forfeiture of the right to make 
the return, and will be a perfect bar to any action to 
recover the amount of such check, but that it merely 
fixes a time at which the creditor bank may be author- 
ized to treat the check as paid, and be able to regulate 
with safety its relation to other parties. The payment 
' ' must be regarded as only provisional until the hour 
of one o'clock, to become complete only in case the 
check is not returned at that time. And if by any mis- 
take of fact the return of the check is not so made, 
then, as between the two banks, it is to be treated as a 
payment under a mistake of fact precisely to the same 
extent and with the same right to reclaim which would 
have existed if the payment had been made by the sim- 
ple act of passing the money across the counter directly 
to the payee on the presentation of the check. ' ' And, 
therefore, under this interpretation of the rule, if the 
fact that the check is bad is not discovered until after 
one o'clock, nevertheless the bank upon which it is 
drawn, if such bank has exercised reasonable care, may 
return it to the bank which sent it through the clear- 
ing-house, if in the interval between one o'clock and 
the time of such return the latter bank has not changed 



TH£ ci^aring-hous^. 89 

its position, as by paying the check or rendering itself 
liable for the amount. 1 But, in such case, there must 
have been reasonable care exercised by the bank upon 
which the check was drawn; there must have been 
such a mistake as will entitle a party to recover as for 
a mistake of fact. If there has been carelessness, there 
can be no recovery of the amount. Thus, where the 
account of the drawer of the check had not varied 
materially for a month, and had not been sufficient to meet 
the check for more than three months, and the teller 
paid the check without having made any examination 
of the account, it was held that the check could not be 
returned, there having been no mistake of facts in a 
legal sense, but laches merely. 2 

The correctness of the principle established in Massa- 
chusetts, that where there has been a mistake a check 
may be returned after the hour fixed by the rule of the 
clearing-house, was questioned in Preston v. Canadian 
Bank of Commerce, 3 a case which arose under the rules 
of the Chicago clearing-house. In that case Blodgett, 
United States district judge, said: "It seems to me 
that the Boston case has gone to the very verge of the 

1 Merchants' Nat'l Bank v. Nat'l Eagle Bank, 101 Mass., 281 ; 
Merchants' Nat'l Bank v. Nat'l Bank of the Commonwealth, 139 
Mass., 513. 

2 Boylston Nat'l Bank v. Thompson, 101 Mass., 287. But it is 
the rule in some jurisdictions that money paid under a mistake 
of facts may be recovered back, however negligent the party 
paying may have been, unless the payment has caused such a 
change in the position of the other party that it would be unjust 
to require him to refund. (Nat'l Bank of Commerce v. Nat'l 
Mechanics' Banking Association, 55 N. Y., 211.) And where such 
rule prevails the doctrine stated in the text would not apply. 

3 23 Fed. Rep., 179. 



90 PRATTS* MANUAL OF BANKING UW. 

application of the rule that money voluntarily paid 
under a mistake can be recovered back. * * * If 
parties competent to contract within what time they 
may correct mistakes in their dealings with each other 
have so contracted, it seems to me the courts have no 
right to override or disregard such an agreement. If a 
mistake is discovered within an hour, or within ten 
minutes, after the expiration of' the time limited by the 
agreement for its correctness may be corrected, I can see 
no reason why it cannot be corrected a week afterward, 
or whenever it is discovered. The Massachusetts court 
puts its decision on the ground that you may correct a 
mistake of this kind at any time after it is discovered, 
if it places the party to whom the check is returned in 
no worse condition than it would have been if it had 
been returned within the stipulated time, thus over- 
looking the rule that parties may agree that they shall 
not have the right to correct mistakes unless done 
within a limited time. ' ' 

But this criticism was answered very conclusively by 
the Massachusetts court in a recent case. 1 "We have 
not," said Devens, J., "overlooked the right of parties 
to make such agreement as they choose. The question 
is as to the interpretation of the rule which they, as mem- 
bers of the clearing-house, have adopted. * * * If 
it were intended that mistakes should never be corrected 
unless discovered by one o'clock, this should in terms 
explicitly appear." 

The weight of reason, as well as the weight of author- 
ity, would appear to be in favor of the interpretation 
which the rule has received in Massachusetts. 

1 Merchants' Nat'l Bank v. Nat'l Bank of the Commonwealth, 
139 Mass., 513. 



TH£ et£ARINOH0US£. 9 1 

In a recent case in the Supreme Court of Louisiana it 
was held that if a member of the clearing-house, know- 
ing of its inability to meet the demands against it, 
should fail to give notice of such fact, as required by 
the rules, and should delay so to do until after a cred- 
itor bank, in the exercise of its right under the rules, 
has given its customers credit for the amount of the 
checks on the debtor bank sent by it through the clear- 
ing-house, settlement between the banks must be re- 
garded as final and conclusive. 1 

"Whether Sending Instrument Through the 
Clearing-House is a Demand of Payment. — Send- 
ing a check through the clearing-house is, of course, a 
demand for payment of the bank on which it is drawn. 2 
But a different rule appears to prevail as to promissory 
notes made payable at a bank. In Massachusetts 
(which is the only State in which the question appears 
to have been determined judicially) it has been held 
that the sending of such a note through the clearing- 
house, not accompanied by any special demand of pay- 
ment, can give no greater rights to the bank that sends 
it than if the note had been left at the bank where 
payable, without any demand of payment or any in- 
structions in relation thereto ; and, as a consequence, 
the maker would have until the close of banking hours 
to pay the note, and the bank receiving it could be in 
no default, if it was returned as soon as the fact became 
certain that it would not be paid. 3 But in this case it 



^loffer v. Louisiana Nat'l Bank, 35 L,a. Ann., 251. 
2 Reynolds v. Chettle, 2 Camp., 596. 

3 Nat'l Exchange Bank v. Nat'l Bank of North America, 132 
Mass., 147. 



92 ipratt's manual of banking law. 

appeared that it is not a uniform practice with the 
banks composing the Boston Clearing- House Asso- 
ciation to send notes through the clearing-house ; that 
some of the members decline to thus send or receive 
notes ; and that those which do, take back the notes, if 
not paid, after one o'clock, the hour by which all checks 
not good are to be returned ; from which facts the court 
drew the conclusion that sending notes through the 
clearing-house is simply a method, adopted by such 
banks as see fit to do so, for placing them in the banks 
where they are payable, to be collected in the usual and 
ordinary course of business. 

The custom of banks composing other clearing-house 
associations is probably the same as that of the Boston 
banks, and the same rule would therefore apply to 
them. But if it is the uniform practice of all the banks 
belonging to any clearing-house association to send all 
notes through the clearing-house, then it would be 
held, no doubt, that sending a note through the clear- 
ing-house to the bank at which it is payable is a de- 
mand of payment. 

Bank 'Which has Not Conformed to Customs 
and Usages of the Clearing-House Can Not Avail 
Itself of Them. — A bank which is a member of a 
clearing-house cannot avail itself of the advantages to 
be derived from the customs and usages of that insti- 
tution when on its own part it has failed to conform to 
those customs and usages. For example, the custom 
of the banks composing a clearing-house association to 
return a check as not good when there is not enough 
money on deposit to pay it in full cannot control in 
determining what amount is to be refunded by the bank 



COLLECTIONS. 93 

from which it was received, when the bank upon which 
it was drawn has failed to comply with the rule that 
checks not good shall be returned before a certain hour. 1 
And so, a bank which has not complied with the rule 
as to the notification to be given when a bank is not 
able to pay the balance against it forfeits or waives its 
right to any benefit accruing from the rule that when 
a bank cannot meet its obligations it is to hold in trust 
all the checks received by it that morning from the 
other banks. 2 

No Sanctity Attached to Communications 
Through Clearing- House. — The law attaches no 
sanctity to the clearing-house as a source of communi- 
cation between banks, and none in fact can be imputed 
to it. Therefore, the fact that a forged check was re- 
ceived through the clearing-house will not afford the 
bank upon which it is drawn any better excuse for fail- 
ing to detect the forgery than if the check had been 
presented at the bank counter. 3 



CHAPTER XIV. 



COLLECTIONS. 

Degree of Care and Skill Required. — As an agent 
for collection a bank is bound to the use of reasonable 

1 Merchants' Nat'l Bank v. Nat'l Bank of the Commonwealth, 
139 Mass., 513. 

2 Bloffer v. Louisiana Nat'l Bank, 35 La. Ann., 251. 

3 Commercial and Farmers' Nat'l Bank v. First Nat'l Bank, 30 
Md., 11. 



94 PRATTS' MANUAL OF BANKING LAW. 

skill and ordinary diligence. By reasonable skill is 
understood such as is ordinarily possessed and exercised 
by persons of common capacity engaged in the same 
business ; and by ordinary diligence is understood that 
degree of diligence which persons of common prudence 
are accustomed to use about their own affairs. Any- 
thing short of this will be negligence ; and for any loss 
resulting to the customer by reason of such negligence 
the bank will be liable. 1 But while the general rule is 
thus very simple in the abstract and very easily stated, 
the application of it is sometimes a matter of great dif- 
ficulty. 

Bank Regarded as Agent for Pay. — In the first 
place, it is to be observed that a collecting bank is re- 
garded as an agent for pay, whether it does or does not 
make any special charge for the collection. 2 The ex- 
pectation that more or less of the money may remain in 
its possession for a longer or shorter time forms a valu- 
able consideration for the undertaking. 3 And although 
the making of collections may be an unproductive part 
of the bank's business, yet the whole ordinary business 
of the bank with its dealers (which is one of mutual 
profit or accommodation) is to be taken together, and 
the general profits and advantages of the business are 
deemed to constitute a consideration for any services of 
this kind.* 

Duties as to Presentment. — The bank must pre- 

1 Mechanics' Bank v. Merchants' Bank, 6 Mete, 13. 
2 Smedes v. Utica Bank, 20 Johns., 372. 
s Id. 

* Allen v. Merchants' Bank, 22 Wend., 215. See also Reves v. 
State Bank, 8 Ohio St., 465. 



coixkctions. 95 

sent the paper for acceptance or payment, as the case 
requires, so as to charge all the parties thereto prior to 
the holder. Therefore, if presentment is made either 
too early or too late, so that any of the parties to the 
instrument are discharged from liability thereon, the 
bank will be held for the loss resulting to the customer. 1 

The bank must not receive any but a clear and un- 
equivocal acceptance. If the acceptance is not in 
proper form, the customer must be immediately noti- 
fied. Where a bill of exchange was drawn by a manu- 
facturing company upon one of its officers individually, 
and he accepted in such form that the acceptance was 
that of the company and not his individual acceptance, 
it was held to be the duty of the bank to have notified 
the holder, as in case of non-acceptance, and, having 
failed to do this, the bank was liable for the amount. 2 

Although when a bill is made pa}' able at a day cer- 
tain, as at a fixed time after its date, presentment for 
acceptance before that time is not necessary in order to 
charge the drawer or indorsers, yet where a bank re- 
ceives such a bill for collection, its duty is to present 
the bill for acceptance without delay. For it is to the 
owner's interest that the bill should be so accepted, as 
only by accepting it does the drawee become bound to 
pay it, and until such acceptance the owner has for his 
debtor only the drawer, and the step is one which a 
prudent man of business, ordinarily careful of his own 
interests, would take for his protection. 3 

1 Bank of Delaware County v. Broomhall, 38 Penn. St., 135 ; 
Ivory v. Bank of Missouri, 36 Mo., 475 ; Georgia Nat'l Bank v. 
Henderson, 49 Ga., 487. 

2 Walker v. New York State Bank, 9 N. Y., 582. 

3 Allen v. Suydam, 17 Wend., 368. 



96 PRATTS' MANUAL OF BANKING LAW. 

If the date of a note is so imperfect or obscure that 
it may be read as either of two dates — as, for instance, 
may be read either 5th or 15th — the bank should not 
undertake to interpret it out, but should get the holder 
to state which is the true date, or should make present- 
ment so as to secure the holder's rights in either case. 1 

To Whom Notice of Dishonor Must be Given. — 
If the paper is dishonored, the bank must give due 
notice of such fact, so that the recourse of the customer 
against all prior parties hereto may be preserved. 2 . 
Whether the bank is bound to give notice to all parties 
required to be notified in order to charge them with 
liability, or is bound to send notice only to the person 
from whom it received the paper, is a question not 
altogether free from doubt. But the weight of authority 
is that the bank is required to notify only its own imme- 
diate principal, unless there is some contract, express 
or implied, with the customer to give notice to all par- 
ties, or there is a custom to that effect. 3 In the leading 
case of Smedes v. Bank of Utica it was found that there 
was a local usage to give notice to all the indorsers of 
a note ; and accordingly the bank, having failed to notify 
one of the indorsers from whom the amount might have 
been recovered if due notice had been given, was held 
liable to the customer for the loss. If for any reason 
notice to the indorsers is not necessary in order to charge 

*Bank of Delaware County v. Broomhall, 38 Penn. St., 135. 

2 Van Wart v. Wooley, 3 B & C, 419; Bank of Washington v. 
Triplett, 1 Pet, 25; Smedes v. Bank of Utica, 20 Johns., 371; 3 
Cow., 662. 

3 Phipps v. Milbury Bank, 8 Mete., 79; State Bank v. Bank of 
the Capitol, 41 Barb., 343 ; Bank of United States v. Goddard, 5 
Mason, 366. 



COLLECTIONS. 97 

them, the bank cannot be made liable for any neglect to 
notify them. 1 

Time in which Check Must be Presented. — 

The rule of the common law is that the collecting bank 
has until the close of banking hours on the next busi- 
ness day following that on which the check was received 
to present it for payment. The same time is allowed in 
which to forward the check when it is payable at a bank 
in another place. And the correspondent of the trans- 
mitting bank has likewise until the close of business on 
the day after receiving it to present it to the bank on 
which it is drawn. Thus, if the check is received by 
the collecting bank on Monday, that bank may wait 
until Tuesday to forward it to the correspondent bank, 
and the correspondent bank receiving the check, say, on 
Thursday, is not required to present it for payment 
until some time during banking hours on Friday. 2 But 
this rule of the common law may be modified by 
usage and custom. And where it is the uniform prac- 
tice of the banks in a place to make an earlier present- 
ment, customers would be justified in supposing that 
checks would be presented in accordance with this 
practice. 3 

Bank not Excused for Neglect by Fact that 
there Were no Funds. — Most of the controversies 
that have arisen between banks and their customers on 
account of the failure of the bank to make due pre- 
sentment of checks have naturally been cases in which 

1- West Branch Bank v. Fulmer, 3 Penn. St., 399. 

2 Hare v. Henty, 10 C. B., N. S., 65. 

3 See observations of Littledale and Parke, J. J., in Boddington 
v. Schlencker, 4 B. & Ad., 752, 



98 PRATTS' MANUAL OF BANKING UW. 

the drawer became insolvent in the interval between 
the drawing of the check and the presenting of the 
same. In such a case it will not afford the collecting 
bank an excuse for its neglect to make proper present- 
ment that there were not sufficient funds in the bank 
on which the check was drawn to meet it at maturity. 
That is not for the consideration of the agent. For it 
might well be that, had the check been presented and 
due notice of its dishonor given to the holder, an imme- 
diate demand on the debtor, with such legal measures 
as their business relations might render advisable, would 
have led to the payment of the instrument. 1 

Should not Procure Certification of Check. — 

A bank receiving a check for collection should require 
payment of it, and should not have it certified. For 
the certification of the check will operate as a payment 
as between the holder and the drawer, and release the 
latter from all liability for the amount ; and, accord- 
ingly, the bank will be liable to the customer for having 
so negligently performed its duty that a party to the 
instrument was discharged from liability. 2 

Bank Required to do All that Holder Himself 
Would Do. — But the duty of the bank is not always 
discharged by making presentment and giving notice 
of dishonor, so as to secure and preserve the liability 
of all the parties thereto. The diligence required of 
the holder of paper in order to charge prior parties is 
not always the measure of the diligence due from the 
collecting bank to its customer. It is an agent for re- 

*Bank of New Hanover v. Kenan, 76 N. C, 340. 

2 Essex County Nat'l Bank v. Bank of Montreal, 7 Biss., 193. 



COIXKCTIONS. 99 

ward, and as such is bound to do all that the owner of 
the paper himself would do if he were an ordinarily 
prudent and careful man} Thus it has been said by 
the New York Court of Appeals : ' ' Suppose an agent 
receives for collection from the payee a sight draft. No 
circumstances can make it his duty, in order to charge 
the drawer, to present it for payment until the next 
day. He has entered into no contract with the drawer, 
is not employed or paid by him to render him any 
service, and owes him no duty to protect him from loss. 
What is required to be done to charge the drawer is 
simply a compliance with the condition attached to 
the draft, as if written therein ; and that condition is 
in all cases complied with by presentation, demand, and 
notice on the next day after receipt of the draft. But 
suppose the agent, on the day he receives the draft, 
obtains reliable information that the drawee must fail 
the next day, and that the draft will not be paid unless 
immediately presented ; what, then, is the duty he owes 
his principal, whose interest for a compensation he has 
agreed with proper diligence and skill to serve in and 
about the collection of the draft? Clearly, all would 
say, to present the draft at once ; and if he fails to do 
this and loss ensues, he incurs responsibility to his prin- 
cipal ; and yet the drawer would be charged if it was 
not presented until the next day. ' ' 2 And, as we have 
seen above, although presentment of a draft for accept- 
ance in certain cases is not necessary in order to charge 
the drawer, yet the bank is bound to make such pre- 

1 Smith v. Miller, 43 N. Y., 172 ; 52 N. Y., 545 ; First Nat'l Bank 
of Meadville v. Fourth Nat'l Bank of New York, 77 N. Y, 320 ; 
89 N. Y, 412. 

2 First Nat'l Bank v. Fourth Nat'l Bank, supra. 



IOO PRATTS' MANUAL OF BANKING LAW. 

sentment, it being for the interest of the customer that 
this should be done. 

Whether Paper Should be Sent Direct to the 
Bank which is to Make Payment. — It is a practice 
which appears to prevail to a wide extent among banks 
to send checks and drafts deposited for collection 
directly to the banks on which they are drawn. As to 
the propriety of this the courts are not agreed. In 
Kngland and in New York they have sanctioned the 
practice. 1 But the Supreme Court of Pennsylvania, on 
the other hand, has held, in a recent case, that a bank 
on which a check is drawn is not a suitable agent to 
which to transmit the check for collection. 2 In the 
course of the opinion in this case it was said : ' ' We think 
the principle may be stated as a true one that no firm, 
bank, corporation, or individual can be deemed a suit- 
able agent, in contemplation of law, to enforce in be- 
half of another a claim against itself. * * * We 
interpret the cases to which we have referred as estab- 
lishing the rule of transmission to a suitable corre- 
spondent or agent to mean that such suitable agent 
must, from the nature of the case, be some other than 
the party who is to make the payment. By no other 
rule can the rights of indorsers be protected if it is the 
interest of the party who is to make the payment to 
hinder, postpone, or defeat payment. This imposes no 
hardship on the institution undertaking to transmit for 
collection, which can always protect itself by stipulat- 

1 Bailey v. Bodenham, 16 C. B., N. S., 295 ; Hey wood v. Pick- 
ering, L. R. 9 Q. B., 428 ; Indig v. Nat'l City Bank, 80 N. Y., 
100; Shipsey v. Bowery Bank, 59 N. Y., 491. 

2 Merchants' Nat'l Bank v. Goodman, 109 Penn. St., 422, 



COIXKCTIONS. IOI 

ing that special instructions by the depositor shall be 
given which will save the collecting bank from all risk 
or peril. ' ' 

In view, therefore, of the conflict of judicial opinion 
on this point the safer course for the collecting bank is 
to transmit to some bank other than the one which is 
to make the payment, and where this cannot be done 
conveniently there should be some special agreement 
made with the customer. 

Certified Check Should Not Be Sent to Certify- 
ing Bank. — But whatever may be the true rule in re- 
gard to checks and drafts generally, it would seem to 
be quite clear that where a check has been certified it 
should not be sent direct to the certifying bank, for by 
certifying the check such bank has become primarily 
liable for its payment, and would, therefore, be no more 
a suitable agent to make the collection than the maker 
of a note would be a suitable agent to collect from him- 
self. 1 If the collecting bank has no proper agent at 
the place through which to make the collection, it 
should so inform the customer and act on his instruc- 
tions. But if it takes the check without special stip- 
ulation, the customer is authorized to assume that it 
has a suitable agent to whom the paper may be trans- 
mitted, and that it will make the collection through such 
agent. 2 

Duty of Bank to Inquire After Paper Not 
Heard From. — Where paper transmitted is not heard 
from within a reasonable time, the duty of the collecting 

trovers' Nat'l Bank v. Provision Co., 117 111., 100. 
2 Id. 



102 PRATTS* MANUAL OF BANKING UW. 

bank is to make inquiries concerning it and to notify 
the customer of the delay or loss ; and failing to do 
this, the bank will be guilty of negligence, and will be 
liable to the customer for any injury occasioned to him 
thereby. 1 And it has been said that where a check or 
draft is forwarded directly to the bank on which it is 
drawn, this will not lessen, if, indeed, it does not in- 
crease, the diligence required of the collecting bank in 
this particular. 2 The fact that the bank transacts a 
large business will not relieve it from the duty of watch- 
ing after every piece of paper which it has undertaken 
to collect. 3 A reasonable time for the bank to await 
advice concerning the paper before making any inquiry 
would be, in ordinary cases, the time required to re- 
ceive an answer from the correspondent in the usual 
course of mail and according to the customary method 
of dealing between banks. In a case between two 
Colorado banks, in which neglect to inquire after paper 
not heard from was charged, the collecting bank sought 
to set up in defense an alleged custom of the Denver 
banks to rely wholly upon monthly statements, and not 
to inquire after remittances in the interim between such 
statements ; but the evidence failed to establish such a 
custom, but showed, on the other hand, that banks in 
general were in the habit of so keeping their books as 
to have their attention called to a failure to receive 
advices, in order that they might institute the needful 
inquiries, unless upon the eve of the time when the 

1 Shipsey v. Bowery Bank, 59 N. Y., 491 ; First Nat'l Bank of 
Trinidad v. First Nat'l Bank of Denver, 4 Dill., 290. 

2 First Nat'l Bank of Trinidad v. First Nat'l Bank of Denver, 
supra. 

3 Id. 



COLLECTIONS. 103 

monthly statement was due. 1 And such a course is 
plainly the only safe course for a bank to pursue. 

Must Communicate to Correspondent Instruc- 
tions of Holder. — When the customer gives the bank 
special instructions concerning the identity or place of 
residence of the party who is to make payment, it is 
the duty of such bank to transmit those instructions to 
the agent or correspondent to whom the paper is sent. 
And no custom can absolve the transmitting bank from 
this duty, it being of the very essence of the under- 
taking. 2 

Can Receive Only Money in Payment. — Like 
any other agent, the collecting bank can receive pay- 
ment of the debt due its principal only in the legal cur- 
rency of the country, or in bills which pass as money at 
their par value by the consent of the community. 3 It 
cannot take goods or commodities in payment, unless 
it has special authority so to do. 4 And if the bank 
receives payment in anything but money or its equiv- 
alent, its action will not operate to discharge the person 
making the payment, for, knowing the bank to be an 
agent for collection, such person is bound to inquire 
whether it has authority to accept payment in some- 
thing else than money. 5 

Measure of Damages. — The measure of damages 
which the customer may recover of the collecting bank 

1 First Nat'l Bank of Trinidad v. First Nat'l Bank of Denver, 4 
Dill., 290. 

2 Borup v. Nininger, 5 Minn., 417. 
3 Ward v. Smith, 7 Wall., 447. 
4 Mudgett v. Day, 12 Cal., 139. 
b Id. 



104 PRATTS* MANUAL OF BANKING UW. 

for failure to properly perform its duty as collecting 
agent is the actual loss which he has sustained. Prima 
facie this loss is the amount of the bill or note ; but the 
bank may show that the whole amount has not been 
lost to him. 1 It has been said by the Supreme Court 
of Minnesota : ' ' The defendants may mitigate the dam- 
ages by showing either the solvency of the maker or 
the insolvency of the indorser, or that the paper was 
partially or wholly secured, or any other fact that will 
lessen the actual loss to the plaintiff, the real loss oc- 
casioned by the improper conduct of the defendant being 
the fact for the jury to arrive at in measuring the plaint- 
iff's damages." 2 And in the case of First National 
Bank of Meadville v. Fourth National Bank of New 
York it was said by Earl, J. : "In all these cases, the 
negligence of the agent being established, it is a ques- 
tion of damages ; and the agent may show, notwith- 
standing his fault, that his principal has suffered no 
damages, and the recovery can then be for nominal 
damages only." 

Insolvency Revokes Authority to Enter General 
Credit for Avails. — The general rule of agency that 
the bankruptcy of the agent operates as a revocation of 
his authority to receive money on account of his prin- 
cipal is applicable to banks acting as agents in the mat- 
ter of collections, at least so far as the bank has been 
authorized to place the proceeds with its own funds and 
enter a general credit for the amount. Therefore, where 
a bank has received paper for collection, with authority 
to credit the customer with the proceeds when collected, 

1 First Nat'l Bank v. Fourth Nat'l Bank, 77 N. Y., 320. 
2 Borup v. Nininger, 5 Minn., 523. 



COU.KCTIONS. 105 

and before the collection is made such bank fails and 
suspends business, such failure and suspension will 
operate as a revocation of the authority given by the 
customer to mingle the avails of the paper with the 
general funds of the bank, so as to make the customer 
a general creditor ; and if the collection is afterward 
made, either by the insolvent bank itself or by its agent 
or correspondent, the customer is entitled to the specific 
fund. 1 But where the customer is indebted to the bank, 
then, perhaps, the power given to enter a general credit 
is coupled with such an interest as to make it irrevoca- 
ble. 2 

Duty 'Where Check Is Received in Payment. — 

Where a bank in making a collection receives in pay- 
ment a check instead of money, its duty is to make 
presentment of the check to the bank on which it is 
drawn as soon as with reasonable diligence this can be 
done, and any delay so to do will be at the peril of the 
collecting bank. 3 And the bank would not be justified 
in holding such check for the purpose of sending it 
through the clearing-house in the ordinary course of 
business, unless, perhaps, the check could be presented 
in this way as soon as it could be in any other. 4 This 
question was very fully considered by the New York 
Court of Appeals in Smith v. Miller, which was before 
the court twice. The collecting agent in that case was 

1 First Nat'l Bank of Crown Point v. First Nat'l Bank of 
Richmond, 76 Ind., 561. 

•Lid. 

3 Smiths. Miller, 43 N. Y., 172; S. C, 52 N. Y., 545; First 
Nat'l Bank of Meadville v. Fourth Nat'l Bank of New York, 77 
N. Y, 320 ; S. C, 89 N. Y, 412. 

4 See cases cited in preceding note. 



106 PRATTS' MANUAL OF BANKING UW. 

not a bank, but the principle there settled is equally 
applicable to a bank acting in that capacity, and was so 
applied in a case which subsequently arose between the 
First National Bank of Meadville, Pennsylvania, and 
the Fourth National Bank of New York. In Smith v. 
Miller the collecting agents received in payment of a 
draft the check of a firm of merchants about one o'clock 
in the afternoon, and, without presenting it for certifica- 
tion to the bank on which it was drawn, deposited it 
in another bank for collection, and by the latter bank 
it was sent through the clearing-house the next morn- 
ing. In the mean time the drawers had failed, and when 
the check was received next morning by the bank on 
which it was drawn that bank refused to pay it. Held, 
that the agents were guilty of negligence in not pre- 
senting the check for payment or certification on the 
day they received it, although they had but two hours 
on that day in which to make such presentment. 

In First National Bank of Meadville v. Fourth Na- 
tional Bank of New York the plaintiffs had sent to 
the defendants a sight draft for $6,000 drawn upon Cul- 
ver, Penn & Co. , bankers in the city of New York. The 
draft was regularly presented for payment on the morn- 
ing it was received, and the drawees gave their check 
on the Third National Bank for the amount. This 
check the Fourth National Bank did not present to the 
Third National Bank on that day, but it was sent 
through the clearing-house in the regular course of 
business the next day. In the mean time Culver, Penn 
& Co. had failed, and when the check was received by 
the Third National Bank payment was refused. Upon 
these facts the Fourth National Bank was held to have 
been negligent in the performance of its duty. ' ' The 



COLLECTIONS. I07 

rule as recognized," said Karl, J., "is not unjust or 
unreasonable or inconveniently uncertain. Here the 
defendant was bound to present this draft and demand 
the money thereon. It took a check. That placed in 
its hands the means of procuring the money at once. 
It should have presented the check for payment or cer- 
tification as soon as with reasonable diligence it could, 
and the delay was at its peril. ' ' * 

The case of a check received inpayment of paper which 
the bank has undertaken to collect must not be confounded 
with that where the check itself is the instrument deposited 
for collection. In the latter case, as we have seen, the 
bank will ordinarily perform its duty if it presents the 
check before the close of business hours on the day 
following — that being considered as high a degree of 
diligence as could reasonably be expected, and being 
all that the bank has undertaken to do. But the rule 
as to the presentment of a check taken in payment is 
based upon another principle, viz., that one acting for 
another is not authorized to receive anything in pay- 
ment except money, and that in taking a check he acts 
at his own peril, unless he exercises diligence in pro- 
curing the money upon it. 

When Liable for Mistake of Law. — In general, 
the rules of law in regard to the presentment of bills of 
exchange and promissory notes for payment, and for 

1 On the second trial of this case the defendants sought to show 
a custom of collecting such checks through the clearing-house, 
but it was found that the evidence failed to show such a custom. 
' ' This practice prevailed only among banks making exchanges 
through the clearing-house. It did not prevail among other 
banks, or with savings-banks or trust companies, or with respect 
to checks on private bankers. ' ' 



Io8 PRATTS* MANUAL OF BANKING LAW. 

giving notice in case of dishonor, are so plain and sim- 
ple and so well known by all within the line of whose 
business such duties come that any failure of a bank, 
acting in behalf of another, to comply with them would 
carry with it such proof of either want of skill or want 
of ordinary diligence as to render the bank liable to its 
customer. But for an honest mistake in a doubtful 
matter of law about which opinions may differ the bank 
will not be held responsible. 1 And where it follows the 
uniform custom of banks in such matters it will be 
protected, although the courts should afterward deter- 
mine that the rule of law is different. 2 Thus, where a 
bank in Boston, following the usual custom of the banks 
in that city, protested a post note, without allowing 
grace thereon, and it was afterward determined by the 
Supreme Court of that State that post notes were en- 
titled to grace, it was held that the bank, having fol- 
lowed the practice which had generally prevailed up to 
that time, was excusable. 3 But if, when the course to 
be adopted is doubtful, the rights of the customer can 
be secured in any event, as, for instance, by presenting 
paper on both dates, the duty of the bank is to proceed 
accordingly ; and- failing to do this, it will be liable for 
any mistake. 4 

Whether Liable for Neglect or Default of Cor- 
respondent. — Whether the collecting bank is respon- 
sible for the neglect or default of the correspondent or 
other agent to which it transmits paper payable in 

1 Mechanics' Bank v. Merchants' Bank, 6 Mete, 13. 

2 Id. 

3 Id. 

4 Georgia Nat'l Bank v. Henderson, 49 Ga., 487. 



COLLECTIONS. 109 

another place is a point upon which the authorities do 
not agree. On the one hand, it is held that, in the 
absence of an express or implied contract varying such 
liability, the collecting bank is equally liable for the 
neglect or default of any such, correspondent or other 
agent as it is for the neglect or default of one of its own 
officers. This is the rule adopted by the Supreme Court 
of the United States, 1 and by the courts of England, 2 
New York, 3 Ohio, 4 Michigan, 5 and Montana. 6 It is 
illustrated by the case of the Exchange National Bank 
of Pittsburgh against the Third National Bank of New 
York, 7 decided by the Supreme Court of the United 
States in 1884. The Pittsburgh bank sent drafts drawn 
on a firm in Newark, N. J.,, to the New York bank for 
collection, which drafts were transmitted by the latter 
bank to its correspondent in Newark, the First National 
Bank of that place. The Newark bank failed to give 
notice that the drafts were not properly accepted, and 
the New York bank was held liable for the loss thereby 
occasioned to the bank in Pittsburgh. And this liabil- 
ity of the collecting bank will extend to any neglect or 
default on the part of any agent employed by any of its 
correspondents, no matter how far removed from it that 
agent may be. Thus, where A deposited with » a New 

Exchange Nat'l Bank v. Third Nat' 1 Bank, 112 U. S., 276. 

2 Van Wart v. Woolley, 3 B. & C. , 439 ; Mackersy v. Ramsays, 
9 CI. & F., 818. 

3 Allen v. Merchants' Bank, 22 Wend., 215 ; Montgomery County 
Bank v. Albany City Bank, 7 N. Y., 459 ; Commercial Bank v. 
Union Bank, 11 N. Y., 203. 

4 Reeves v. State Bank, 8 Ohio St., 465. 
5 Simpson v. Walby, 30 N. W. Rep., 199. 
6 Power v. First Nat'l Bank, 6 Mont, 251. 
7 H2U. S., 276. 



IIO PRATTS' MANUAL OF BANKING LAW. 

York bank for collection a draft drawn on a firm in 
Philadelphia, and the New York bank sent the draft to 
a bank in Philadelphia, and the Philadelphia bank 
delivered it to a notary, who failed to give notice of its 
non-acceptance to the indorsers, so that they were dis- 
charged from liability thereon, the New York bank was 
held liable to A for this neglect of the notary of the 
Philadelphia bank. 1 So, where bankers in Edinburgh, 
employed to obtain payment of a bill drawn on Cal- 
cutta, transmitted it to their correspondent in London, 
who forwarded it to a house in Calcutta, to whom it 
was paid, but who failed while the funds were in their 
hands, it was held that the bankers in Edinburgh were 
liable to their customer for the amount. 2 

On the opposite hand, it is held by other courts that, 
where the employment of a correspondent or other 
agent is necessary or customary, the duty of the collect- 
ing bank is fully discharged if it exercises reasonable 
care in the selection of such correspondent or other 
agent, and that when the paper has been duly trans- 
mitted with the necessary instructions to a suitable 
agent at the place where it is payable the transmitting 
bank will not be liable for any neglect or default of 
such agent. This is the rule in Massachusetts, 3 Con- 
necticut, 4 Illinois, 5 Iowa, 6 Wisconsin, 7 Missouri, 8 and 
Tennessee. 9 

1 Allen v. Merchants' Bank, 22 Wend., 215. 

2 Mackersy v. Ramsays, 9 CI. & F., 818. 

3 Dorchester Bank v. New England Bank, 1 Cush., 177. 

4 East Haddam Bank v. Scovil, 12 Conn., 303. 

5 ^Etna Ins. Co. v. Alton City Bank, 25 111., 243. 

6 Guelich v. Nat'l City Bank, 56 Iowa, 434. 

7 Stacy v. Dane County Bank, 12 Wis., 629. 

8 Daly v. Butchers' and Drovers' Bank, 56 Mo., 94. 

9 Bank of Louisville v. First Nat'l Bank, 8 Baxter, 101. 



COLLECTIONS. Ill 

This disagreement as to the liability of the collecting 
bank grows out of the different views which the courts, 
on the one side and the other, respectively, take as to 
the nature of the implied contract between such bank 
and the owner of the paper. By the New York courts 
and those which have followed their lead the collecting 
bank is regarded as an independent contractor, and the 
instruments employed by it in making the collection 
are regarded as its agents, and not the subagents of the 
customer. This view was very clearly explained by 
Justice Blatchford in delivering the opinion of the United 
States Supreme Court in the Exchange National Bank 
v. The Third National Bank. 1 He said, among other 
things: "The contract, then, becomes one to per- 
form certain duties necessary for the collection of the 
paper and the protection of the holder. The bank is 
not merely appointed an attorney, authorized to select 
other agents to collect the paper. Its undertaking is to 
do the thing, and not merely to procure it to be done. 
In such case the bank is held to agree to answer for any 
default in the performance of its contract ; and whether 
the paper is to be collected in the place where the bank 
is situated or at a distance,, the contract is to use the 
proper means to collect the paper, and the bank, by em- 
ploying subagents to perform a part of what it has 
contracted to do, becomes responsible to its customer. 
* * * Whether a draft is payable in the place where 
the bank receiving it for collection is situated or in 
another place, the holder is aware that the collection 
must be made by a competent agent. In either case 
there is an implied contract of the bank that the proper 
measures shall be used to collect the draft, and a right, 

J ii2 U. S., 276. 



112 PRATTS' MANUAL OF BANKING LAW. 

on the part of its owner, to presume that proper agents 
will be employed, he having no knowledge of the agents. 
There is, therefore, no reason for liability or exemption 
from liability in the one case which does not apply to 
the other. And, while the rule of law is thus general, 
the liability of the bank may be varied by consent, or 
the bank may refuse to undertake the collection. It 
may agree to receive the paper only for transmission to 
its correspondent, and thus make a different contract 
and become responsible only for good faith and due dis- 
cretion in the choice of an agent. If this is not done, 
or there is no implied understanding to that effect, the 
same responsibility is assumed in the undertaking to 
collect foreign paper and in that to collect paper payable 
at home. On any other rule no principal contractor 
would be liable for the default of his own agent, where 
from the nature of the business it was evident he must 
employ subagents. ' ' 

The Massachusetts court, on the other hand, and the 
other courts which have adopted a like line of reason- 
ing take an entirely different view of the implied con- 
tract between the parties. According to their conception 
of the undertaking of the bank, it is not absolutely to 
make the collection, but merely to perform properly 
such duties as banks in like cases usually perform them- 
selves, and to select suitable subagents to perform those 
further duties which, from the necessities of the case or 
the custom of banks, it is to be expected will be com- 
mitted to others. In other words, the contract is only 
for the immediate services of the bank, and for its faith- 
ful conduct in selecting suitable subagents for its prin- 
cipal, the owner of the paper . 



COIXKCTIONS. 113 

Liability Extends to Failure of Agents to Pay 
Over Proceeds. — The liability of the collecting bank, 
under the first-mentioned rule, extends to any failure 
of its agents to account for or pay over the proceeds 
after the collection is made, as well as to any failure to 
duly present the paper or give proper notice of dis- 
honor. 1 - Thus, in the English case of Mackersy v. 
Ramsays, before referred to, the collection had been 
duly made by the house in Calcutta, which was acting 
as the agent of Coutts & Co. , the London correspond- 
ents of Ramsay & Co., but the money was lost by the 
subsequent failure of the Calcutta firm. It was held 
by the House of Lords that Ramsay & Co. were liable 
to their customer for the amount. In the course of his 
opinion in this case Lord Cottenham said : "I cannot 
distinguish this case from the ordinary transactions be- 
tween parties having accounts between them. If I send 
to my bankers a bill or draft upon another banker in 
London, I do not expect that they will themselves go 
and receive the amount and pay me the proceeds, but 
that they will send a clerk in the course of the day to 
the clearing-house and settle the balances in which my 
bill or draft will form one item. If such clerk, instead 
of returning to the bankers with the balance should 
abscond with it, can my bankers refuse to credit me 
with the amount ? Certainly not. If the bill had been 
drawn upon a person at York, the case would have 
been the same, although, instead of the bankers em- 
ploying a clerk to receive the amount, they would prob- 
ably employ their correspondent at York to do so ; 
and if such correspondent received the amount, am I to 

1 Mackersy v. Ramsays, 9 CI. & F., 818; Simpson v. Walby, 
30 N. W. Rep., 199; Power v. First Nat'l Bank, 6 Mont, 276. 
8 



114 PRATTS' MANUAL OF BANKING LAW. 

be refused credit because be afterward became bank- 
rupt while in debt to my bankers ? If the balance were 
not in favor of my bankers, the question would not arise, 
so that my title to the credit would depend upon the 
state of the account between my bankers and their cor- 
respondent. The amount in money was received by the 
correspondent of my bankers at York ; as between me 
and them, it was received by them, and nothing which 
might subsequently take place could deprive me of the 
right to have credit with them for the amount." 

When Bank to Which Paper Is Sent Is Agent 
to Receive Proceeds.— But before the collecting bank 
can be held as guarantor of the solvency of the bank to 
which the paper is sent, it must, either expressly or by 
implication, have constituted that bank its agent to re- 
ceive the proceeds. Of course, such an agency must 
necessarily be inferred where it is expected that the 
money is to be paid to the correspondent bank, and by 
that bank transmitted to the collecting bank or credited 
on account. But where the paper is sent by mail 
directly to the bank which is to make the payment, 
with a request to remit the amount, the bank so sending 
the paper does not constitute the other bank its agent to 
receive the proceeds, and though the latter bank, having 
funds of the drawer of the paper, and charging it to his 
account as paid, fails to pay it over to the collecting 
bank, the collecting bank is not responsible to its cus- 
tomer for the amount, unless there has been some negli- 
gence. By vSending the paper to the bank which is to 
make the payment, the collecting bank requests it to 
pay the amount, and not to receive it. The object is to 
extract money from the drawee bank, and not to place 



COU,ECTlONS. 115 

funds in its possession as agent of the collecting bank. 
It has nothing to do but pay the instrument if in funds, 
and, if not in funds, to refuse to pay. The relation 
created between the two banks is not different from that 
which would have resulted had the collecting bank 
made demand by its messenger or by one of its offi- 
cers. 1 

'Whether Liable for Neglect of Notary. — As to 

whether the collecting bank can be held liable when a 
notary to whom it has delivered the paper fails to make 
proper presentment or give due notice of dishonor, there 
is even less uniformity of judicial opinion than on the 
question of its liability for the neglect or default of a 
correspondent. In New York, 2 New Jersey, 3 South 
Carolina,* and Kansas the bank has been held liable 
for the neglect of the notary. But in all of these cases 
it has been pointed out by the courts that the duties 
which the notary failed to properly perform were not 
necessarily committed to such an officer, but were such 
as any clerk or employe of the bank could have dis- 
charged. For any negligence in the performance of 
such duties as the law requires to be performed by a no- 
tary, e. g. , the protesting of a foreign bill of exchange, 
the bank would not, of course, be held answerable. 6 

The contrary rule, that the bank is not responsible for 
the acts of the notary when it exercises due care in the 



1 Indig v. Nat'l City Bank, 80 N. Y., 100. 
2 Ayrault v. Pacific Bank, 47 N. Y., 570. 

3 Titus v. Mechanics' Nat'l Bank, 35 N. J. Law, 588. 

4 Thompson v. Bank of South Carolina, 3 Hill (S. C), 77. 

5 Bank of Iyindsborg v. Ober & Hagerman, 31 Kans., 599. 

6 See Commercial Bank of Kentucky v. Varnum, 49 N. Y M 269. 



Il6 PRATTS' MANUAL OF BANKING LAW. 

selection of such an officer, prevails in Massachusetts, 1 
Maryland, 2 Ohio, 3 Mississippi, 4 and Louisiana, 5 and 
this rule was adopted by the Supreme Court of the 
United States in a case coming to that court from Mis- 
sissippi. 6 In Massachusetts the decisions are based 
upon a uniform local practice of bankers to place paper 
received for collection in the hands of a notary for pre- 
sentment and protest. In the other States mentioned 
the courts proceed upon the ground that the notary is 
a public officer, wholly independent of the bank, and 
specially authorized by the State laws to make present- 
ment of negotiable instruments and protest them when 
dishonored. And it was upon this ground that the Su- 
preme Court of the United States put its decision in the 
case of Britton v. Niccolls. In the course of the opin- 
ion in that case it was said by Justice Field : ' ' Judged 
by the law of Mississippi, the bankers, Britton & 
Koontz, discharged their duty to the plaintiff when they 
delivered the notes received by them for collection to 
the notary public. There is no question as to his quali- 
fications. He was not connected in business with the 
bankers, nor employed by them except in his official 
character. * * * He was a public officer whose 
duties were prescribed by law; and when the notes 
were placed in his hands in order that such steps should 
be taken by him as would bind the indorsers if the notes 
were not paid, he became the agent of the holder of 



1 Warren Bank v. Suffolk Bank, 10 Cush., 585. 

2 Citizens' Bank v. Howell, 8 Md., 530. 

3 Bank v. Butler, 41 Ohio St., 519. 

4 Bowling v. Arthur, 34 Miss., 41. 

5 Baldwin v. Bank of Louisiana, 1 La. Ann., 13. 

6 Britton v. Nicholls, 104 U. S., 757. 



THE BANKER'S UKN. 117 

the notes. Eor any failure on his part to perform his 
whole duty he alone was liable ; the bankers were no 
more liable than they would have been for the unskill- 
fulness of a lawyer of reputed ability and learning, to 
whom they might have handed the notes for collection, 
in the conduct of a suit brought upon them. ' ' 



CHAPTER XV. 



THE BANKER'S LIEN. 

General Nature of the Banker's Lien. — The 

banker's general lien is a right to retain the moneys and 
securities of his customer for a general balance of ac- 
counts. 1 This lien is founded upon custom ; but it has 
been long since so well established that it is judicially 
noticed by the courts, like any other part of the law- 
merchant, and is not required to be proved. 2 By a par- 
ticular agreement this lien may be excluded ; but an 
express agreement is not essential to its origin or con- 
tinuance. Ordinarily it attaches in favor of the bank 
upon the securities and moneys of the customer deposited 
in the usual course of business for advances which are 
supposed to be made upon their credit. 3 And not only 

1 Davis v. Bowsher, 5 T. R., 488 ; Brandao v. Barnett, 12 CI. & 
F. , 786 ; Jourdaine v. Iyefevre, 1 Esp. , 66 ; Jones v. Peppercorne, 
28 L. J., Ch., 153 ; Bank of Metropolis v. New England Bank, 1 
How., 234 ; 6 id., 212 ; Nat'l Bank v. Insurance Company, 104 U. 
S., 54 ; Miller v. Farmers' and Mechanics' Bank, 30 Md., 392 ; In 
re Tallassee Manufacturing Co., 64 Ala., 567 ; Muench v. Valley 
Nat'l Bank, 11 Mo. App., 144. 

2 Brandao v. Barnett, supra. 

3 See cases cited in note 1. 



Il3 PRATTS* MANUAL OF BANKING LAW. 

does it attach against the depositor, but also against the 
unknown equities of all others in interest. 1 "It is 
given by the law upon the presumption that it is upon 
the faith of moneys and securities coming into the pos- 
session of the banker in the course of general dealings 
not especially devoted to other uses a balance is suffered 
to accumulate against the customer. ' ' 2 

There Must Be a Balance Due and Payable. — 

Before the bank can withhold any of the funds or se- 
curities of a customer in virtue of its general lien, there 
must be a debt due and payable ; there is no lien for a 
debt not matured. 3 Thus, where a customer has procured 
a discount of a bank the bank cannot hold any part of 
his deposit to meet his obligation until the paper becomes 
due and payable ; but after the paper discounted falls 
due, then, if it remains unpaid, the bank may, unless 
other rights have intervened, hold a balance of deposits 
and apply it toward the payment of the paper. 4 The Vir- 
ginia case of Ford's Executor v. Thornton 5 has some- 
times been cited as an authority for the proposition that 
a bank may withhold a deposit for the immature indebt- 
edness of an insolvent customer ; but the decision in this 
case was not put upon the ground that the bank had a 
lien, but was decided upon the entirely different prin- 
ciple of equitable set-off, which is applicable to other 
creditors as well as to bankers. And in a recent case 

1 Bank of Metropolis v. New England Bank, i How., 234. 

2 Per Brickell, C. J., in In re Tallassee Manufacturing Co., 
64 Ala., 567. 

3 Jordan v. Nat'l Shoe and Leather Bank, 74 N. Y., 467 ; Manu- 
facturers' Nat'l Bank v. Jones, 2 Pennypacker, 377. 

'Jordan v. Nat'l Shoe and leather Bank, supra. 

6 3 Leigh, 695. 



THK BANKER'S UKN. . 119 

in the Supreme Court of Pennsylvania it was held that 
the insolvency of the customer could not operate to give 
the bank a lien as against a creditor attaching the fund. 1 

Credit Must Have Been Given. — To sustain the 
lien there must have been a credit 'given or value paid 
or some risk or responsibility incurred upon the faith of 
the securities. 2 And where the circumstances of the 
deposit or the course of the dealings between the parties 
are such that it cannot be fairly inferred that this was 
done, no lien will exist. 3 But this credit may be given 
upon the paper which it is expected will be transmitted 
in the usual course of the dealings between the parties. 4 
A balance allowed to stand will be such a credit. On 
this point Chief- Justice Taney, in delivering the opinion 
of the Supreme Court of the United States in Bank of 
Metropolis v. New England Bank, said: "We do not 
perceive any difference in principle between an advance 
of money and a balance suffered to remain upon the 
faith of these mutual dealings. In the one case, as well 
as the other, credit is given upon the paper deposited, or 
expected to be transmitted in the usual course of the 
transactions between the parties. ' ' 

Banker's General Lien Not Favored. — The 

banker's general lien is no exception to the rule that 
general liens are not favored at law, and will be upheld 

1 Manufacturers' Nat'l Bank v. Jones, 2 Pennypacker, 377. 

2 Bank of Metropolis v. NewBngland Bank, 1 How., 234 ; 6 id., 
212 ; Miller v. Farmers' and Mechanics' Bank, 30 Md., 392 ; Milli- 
ken v. Shapleigh, 36 Mo., 596. 

^Brandao v. Barnett, 12 CI. & F., 786 ; Milliken v. Shapleigh, 
supra. 

*Bank of Metropolis v. New England Bank, supra. 



120 PRATTS' MANUAL OF BANKING LAW. 

only in clear cases. And it may be stated as a uniform 
rule that this lien will not be held to attach in any case 
where the circumstances are such that the inference may 
be fairly drawn that the parties did not intend it should 
attach. 

The Intention of the Parties. — And here it is to 
be remarked that the controlling factor in each case is 
the intention of the parties ; and it is the effort of the 
courts to ascertain this intention and to carry it into 
effect. If there is no express contract, or if there are 
no circumstances that show an implied contract incon- 
sistent with the lien, it will be held to attach ; for in 
such case the inference must be that the parties con- 
tracted with reference to a uniform practice which pre- 
vails in the dealings between banks and their customers. 
But where there is some special agreement or other cir- 
cumstances with which the lien is inconsistent, then the 
inference is that the parties did not intend it should 
attach. And, therefore, it is to be observed that all the 
other rules on the subject are merely subsidiary to the 
principal inquiry, What was the intention of the parties ? 

Lien Will Not Attach to Deposits Impressed 
With a Trust. — The lien will not attach to deposits 
impressed with a trust — that is to say, as previously ex- 
plained, to moneys or securities deposited for the pur- 
pose of being applied to some special object. 1 For in 
such case, the bank having undertaken to apply the 
deposit to a special purpose or in a particular manner, 

1 Nat'l Bank v. Insurance Company, 104 U. S., 54; United 
States Bank v. Macalester, 9 Barr, 475 ; Baker v. New York 
Nat'l Exchange Bank, 100 N. Y., 32 ; Nat'l Bank of Fishkill v. 
Speight, 47 N. Y., 668. 



TH£ BANKER'S U£N. 121 

the application of it to an indebtedness due to the bank 
itself would be inconsistent with that undertaking. 
Therefore, it was held in a leading case in Pennsylvania 
that where a bank had received money from a State for 
the purpose of paying coupons of the State bonds, made 
payable at such bank, such money could not be applied 
to the payment of a prior undischarged indebtedness of 
the State to the bank. 1 So, where agents deposited 
money with a bank in their own firm name, but for the 
benefit of their principals, which purpose was under- 
stood by the bank, it was held that the bank could not 
retain any part of this deposit to cover an indebtedness 
due it from the agents. 2 And, likewise, where a deposit 
is made for the purpose of meeting a certain check and 
is so received by the bank, the bank cannot apply the 
amount on the balance due from the customer for whose 
account the deposit is made. 3 

Nor Where Deposit Is Not in the Usual Course 
of Business. — It is not to all property of the customer 
in the possession of the bank that the lien will attach, 
but only to such as comes into its possession in the usual 
course of the dealings between them as banker and 
customer. 4 Therefore, where a customer accidentally 
left a lease with his banker after the latter had refused 
to advance money upon it, the court held that the banker 
had no lien. 5 And so, it was held in a recent case that 
where a note had been left with a bank for discount, 

1 United States Bank v. Macalester, 9 Barr, 475. 

2 Baker v. New York Nat'l Exchange Bank, 100 N. Y., 32. 

3 Straus v. Tradesmen's Nat'l Bank, 36 Hun, 451. 
4 Brandao v. Barnett, 12 CI. & F., 786; Lucas v. Darrien, 7 

Taunt., 278 ; Petrie v. Myers, 54 How. Pr., 513. 
3 Lucas v. Darrien, supra. 



122 PRATTS' MANUAL OF BANKING I,AW. 

which was refused, the bank could not hold the note 
for a balance due from the customer. 1 The leading 
case on this point is the English case of Brandao v.. 
Barnett, decided by the House of Eords in 1846, after 
it had been elaborately considered by both the Courts 
of Common Pleas and the Exchequer Chamber. The 
essential facts in the case were as follows : Brandao was 
a Portuguese merchant, and Barnett and his partners 
were bankers in L,ondon. Edward Burn, a London 
merchant, was the agent and correspondent of Brandao, 
and upon the latter' s direction invested the funds of 
his principal in exchequer bills, which bills he kept in 
tin boxes under his own lock, and left the boxes in the 
banking-house of the defendants for safe-keeping. 
When it became necessary to collect the, interest on the 
bills and exchange them for new bills he delivered 
them to the defendants for this purpose, and when this 
was done he obtained the new bills from the defendants 
when he next called at the banking-house, which gen- 
erally happened within a week or fortnight after the re- 
ceipt of the bills by the defendants ; and when he so ob- 
tained them, he locked them in a tin box as before, 
where they remained until wanted. Finally, after he 
had on one occasion so delivered the bills to the defend- 
ants, and on account of illness had allowed them to re- 
main in their possession for a longer time than usual, 
Burn failed, and the defendants claimed to have a lien 
upon the bills for payments made for his account while 
the bills were in their possession,* the bills being nego- 
tiable, and the defendants having no knowledge that 
they were not the property of Burn. But after elabo- 
rate argument by counsel on both sides, and long and 

1 Petric v. Myers, 54 How. Pr., 513. ' ' 



THE BANKER'S UEN. 1 23 

full consideration on the part of the law lords, it was 
held that there was no lien. In the course of his 
opinion in this case IyOrd Campbell said : ' ' Now, 
it seems to me that in the present case there was 
an implied agreement on the part of the defendants 
inconsistent with the right of lien which they claim. 
It should be recollected that the exchequer bills for 
which the action is brought are the new exchequer bills 
which the defendants obtained for the express and only 
purpose of being delivered by them to Burn, that he 
might deposit them in the tin box, of which he kept 
the key. They not only were not entered in any account 
between Burn and the defendants, but they were not to 
remain in the possession of the defendants ; and the de- 
fendants, in respect of them, were employed merely to 
carry and hold till the deposit in the tin box could be 
conveniently accomplished. Whether this deposit was 
to be made in the same hour in which the securities 
were obtained from the government, without ever being 
placed in a drawer belonging to the defendants, or after 
the lapse of some days, seems to me quite immaterial, 
bearing in mind the purpose for which they were 
obtained and for which they remained in the defend- 
ants' possession. Nor can it make any difference that, 
on the particular occasion out of which this action 
originated, from the illness of Burn, so long a time 
elapsed from the obtaining of the securities without 
their being demanded by him for the purpose of being 
locked up in the tin box ; for if the defendants had not 
a right of lien upon them the moment they obtained 
them, the actual lien clearly could not afterward be 
claimed when his account had been overdrawn. Nor, I 
presume, can any weight be attached to the circum- 



124 PRATTS' MANUAL OF BANKING LAW. 

stance that the tin box in which the exchequer bills 
were to be locked up, and of which Burn kept the key, 
remained in the house of the defendants. Were not 
these exchequer bills obtained by the defendants to be 
delivered to Burn, who was himself to be the deposi- 
tary and custodian of them ? Bankers have a lien on 
all securities deposited with them as bankers ; but these 
exchequer bills cannot be considered to have been de- 
posited with the defendants as bankers. * * * 
This judgment will leave untouched the rule that 
bankers have a general lien on securities deposited with 
them as bankers, but will prevent them from successfully 
claiming a lien on securities delivered to them for a 
special purpose inconsistent with the existence of the 
lien claimed." 

Upon the authority of this and other cases, it may be 
stated as the rule, that a bank will not have a lien upon 
the property of a customer left with it as a special de- 
posit for safe-keeping, unless the parties have specially 
agreed that there shall be such a lien. 1 

Nor Where Securities Are Deposited for a 
Certain Debt or for Debts to a Fixed Amount. — 

Where securities are pledged to a bank for the payment 
of a particular loan or debt, the bank will have no lien 
upon such securities for a general balance, or for the 
payment of other claims. 2 Thus, where a broker depos- 
ited railroad bonds to secure his note for $8,000, it was 

^'Connor v. Majoribanks, 4 M. & G., 435; Ex parte Byre, 1 
Ph., 235. 

2 Duncan v. Brennan, 83 N. Y., 487; Wyckoff v. Anthony, 90 
N. Y., 442 ; In re Medewe's Trust, 26 Beav., 588; Vanderzee v. 
Willis, 3 Bro. Ch., 21 ; Earl of Strathmore v. Vane, L. R. 33 Ch. 
Div., 586. 



THE BANKER'S UEN. 125 

held that the bonds could not be retained to pay his 
indebtedness on another account. 1 And where the 
pledge is made to cover any indebtedness of the customer 
up to a certain amount, the securities cannot be held by 
the bank for any indebtedness beyond that amount ; for 
as the express terms of the pledge limit it to a certain 
sum, it would be inconsistent with those terms that the 
bank should hold the securities for something more. 2 

The Equities of Third Persons. — As has been 
said, the lien attaches in favor of the bank, not only 
against the depositor but against the unknown equities 
of third persons. 3 If money deposited by an agent in 
his own name is in fact the money of his principal, yet 
the bank may have its lien upon this deposit, unless it 
has notice, either actual or constructive, of the fact of 
the ownership. 4 In the same way, it may have a lien 
on trust funds deposited by a trustee in his own name. 5 
And where bills are transmitted for collection, if these 
are received and treated by the receiving bank as the 
property of the forwarding bank, and the former bank 
has no notice, either from the form of the indorsement 
or otherwise, that the bills do not in fact belong to such 
bank, it may retain the paper against the real owner. 6 
The leading case on this subject is Bank of Metropolis 
v. New England Bank. This case came before the Su- 
preme Court of the United States twice, once in 1843 

1 Wyckoff v. Anthony, 90 N. Y., 442. 

2 Karl of Strathmore v. Vane, Iv. R. 33 Ch. Div., 586. 

3 Bank of Metropolis v. New England Bank, 1 How., 234; 6 
Id., 212 ; Brandao v. Barnett, 12 CI. & F., 786. 

4 National Bank v. Insurance Co. , 104 U. S. , 54. 

5 School District v. First Nat'lBank, 102 Mass., 174. 

6 Bank of Metropolis v. New England Bank, supra. 



126 PRATTS' MANUAL OF BANKING LAW. 

and again in 1848. The Bank of the Metropolis, in 
the District of Columbia, had been for a long time deal- 
ing and corresponding with the Commonwealth Bank 
of Massachusetts, which failed on the 1 3th day of Janu- 
ary, 1838. They had mutually remitted for collection 
such bills, etc. , as either might have, which were pay- 
able in the vicinity of each other, which, when paid, 
were credited to the party sending them in the account- 
current kept by both banks and regularly transmitted 
from one to the other ; and they regularly settled upon 
these principles, charging postage, protests, etc., the 
balance being sometimes in the favor of one and some- 
times of the other. On the 24th of November, 1837, 
the Bank of the Metropolis' owed the Commonwealth 
Bank $2,200, and in the latter part of that year the 
Commonwealth Bank sent to the Bank of the Metrop- 
olis for collection in the usual way sundry paper which 
would fall due in February, March, April, May, and 
June following. This was indorsed by E. P. Clark, 
cashier, who was cashier of the New England Bank, 
payable to C. Hood, cashier, who was cashier of the 
Commonwealth Bank, and by him to G. Thomas, 
cashier, who was cashier of the Bank of the Metropolis. 
On the day the Commonwealth Bank failed its cashier 
wrote a letter to the Bank of the Metropolis directing 
it to hold the paper that had been so forwarded ' ' sub- 
ject to the order of the cashier of the New England 
Bank, it being the property of that institution." The 
New England Bank sued the Bank of the Metropolis 
for the proceeds of all the paper so sent, and the court 
below gave judgment for the New England Bank. The 
cashier of the Commonwealth Bank testified that they 
were never the property of the Commonwealth Bank, 



the banker's lien. 127 

nor had the bank any interest therein ; but they were 
at the time of the receipt thereof, and ever after, the 
property of the New England Bank, and subject to its 
order and control. At this time the Commonwealth 
Bank was indebted to the Bank of the Metropolis about 
$2,900. These notes, etc., were indorsed by the cashier 
of the New England Bank without consideration, and 
were placed in the hands of the Commonwealth Bank 
for the mere purpose of collection. The law applicable 
to the subject was stated by Chief-Justice Taney to be, 
that if the Bank of the Metropolis, at the time of the 
mutual dealings between them, had notice that the 
Commonwealth Bank had no interest in the bills and 
notes in question, and that it transmitted them for col- 
lection merely as agent, then the Bank of the Metropo- 
lis was not entitled to retain them against the New Eng- 
land Bank for the general balance of the account of the 
Commonwealth Bank ; but if the Bank of the Metrop- 
olis regarded and treated the Commonwealth Bank as 
the owner of the negotiable paper which it transmitted 
for collection, and had no notice to the contrary, and 
upon the credit of such remittances made or anticipated 
in the usual course of dealings between them balances 
were from time to time suffered to remain in the hands 
of the Commonwealth Bank, then the Bank of the Me- 
tropolis was entitled to retain the paper for the balance 
of account due from the Commonwealth Bank. 

Form of Indorsement May Convey Notice. — 

The form of the indorsement may be sufficient notice that 
the paper does not belong to the transmitting bank. 
Thus, where paper is indorsed ' ' for collection, ' ' the 
bank to which such paper is sent cannot have a lien on 



128 PRATTS' MANUAL OF BANKING LAW. 

it against the real owner ; for this form of indorsement 
conveys an intimation that the paper does not belong to 
the transmitting bank, and that such bank is merely 
the agent of the owner. 1 

In Some States No Lien for Pre-existing 
Debt. — In this connection it is to be observed that, in 
those States in which a pre-existing debt is not a suffi- 
cient consideration to constitute the person acquiring 
negotiable paper a bona fide holder for value, the bank 
can have no lien as against the antecedent equities of 
third persons on paper coming into its possession for 
any indebtedness previously incurred. 2 Nor will the 
case be altered by a long course of dealing between 
the parties by which the bank has allowed a balance to 
stand on the faith of the securities to be afterward 
transmitted. 3 

Bank Not Protected if Securities Are Non- 
Negotiable. — But it is to be borne in mind that the 
lien of the bank will attach as against the equities of 
third persons only where the deposit of the customer 
consists of money or negotiable securities. As to non- 
negotiable securities, the bank would be in no better 
position than any other holder for value, and could have 
no better title to them than had its transferror. 4 

Where There Are a Number of Accounts. — 

1 Cecil Bank v. Farmers' Bank, 22 Md., 148; Bank of Metrop- 
olis v. First Nat'l Bank, 22 Blatch., 58. 

2 McBride v. The Farmers' Bank, 26 N. Y., 450; Appeal of the 
Leggett Spring and Axle Company, in Penn. St., 291. 

3 McBride v. The Farmers' Bank, supra. 

4 Manningford v. Toleman, 1 Coll., 670 ; Stackhouse v. Countess 
of Jersey, 39 L. J., Eq., 421. 



THE BANKER'S UEN. 129 

It frequently happens that a customer, particularly when 
the customer is another bank, has a number of accounts 
with the bank, as, for instance, a loan, a discount, and a 
general account ; and in such case if the customer de- 
posits with the bank securities without stipulating that 
they shall be applicable on only one account, and there 
are no circumstances to show that this was the inten- 
tion of the parties, the bank may hold the securities for 
the general balance. 1 

Deposit and Debt Must Be in Same Right. — 

The bank can have a lien only where the person who is 
both depositor and debtor stands in both the characters 
alike, in precisely the same relation and on precisely the 
same footing toward the bank. 2 And, therefore, a bank 
would have no lien on the individual deposit of a part- 
ner for a balance due the bank from his firm. 3 So, a 
deposit made by one in his fiduciary capacity cannot be 
held for his individual indebtedness. 4 Nor, on the other 
hand, can his individual deposit be held for the indebt- 
edness of his principal or cestui que trust? 

Taking Other Security. — The bank will destroy 
its right of lien if, after the lien has been established, 
security which is payable at a distant day is taken for 
the debt. 6 

1 In re European Bank, L. R. 8 Ch. App., 41. 

2 Watts v. Christie, 11 Beav., 546; International Bank v. Jones, 
119 111., 407. 

3 See cases cited in preceding note. 

4 Ex parte Kingston, I,. R. 6 Ch. App., 632. In cases of this 
kind the question usually is whether the bank has had notice that 
the funds are trust funds. 

5 Swartwout v. Mechanics' Bank, 5 Denio, 555. 

6 Cowell v. Simpson, 16 Ves., jr., 278. 

9 



F>ART II. 

BANK OFFICERS. 
CHAPTER I. 



DIRECTORS. 

The management of the affairs of an incorporated 
bank is usually committed, by the charter or the gen- 
eral banking laws under which the bank is organized, 
to a board of directors, or, as they are sometimes called, 
trustees or managers. The directors have power to act 
for the institution in any matters pertaining to its regu- 
lar business. They have, in general, power to control 
all the property of the bank, to make discounts, to bor- 
row money for the use of the bank, to transfer and as- 
sign its property, to appoint its officers and agents and 
prescribe their duties, and, in short, to exercise all the 
powers conferred upon the bank which are fairly within 
the scope of its regular and ordinary business. 1 And 
this power is exclusive even of the shareholders. Thus, 
the shareholders could not by resolution authorize a 
transfer of the bank's property ; this can be done only 
through the directors. So, the board of directors alone 
is empowered to declare dividends ; the shareholders 
have no power to direct a distribution of the profits. 

1 Burrill v. Nahant Bank, 2 Mete. (Mass.), 163; Hoyt v. 
Thompson, 19 N. Y., 207; Dana v. Bank of U. S., 5 W. & S., 
223 ; Bank of U. S. v. Dunn, 6 Peters, 51 ; Merick v. Metropolis 
Bank, 8 Gill, 59. 

131 



132 PRATTS' MANUAL OP BANKING UW. 

But except they are authorized to do so by the statu- 
tory laws by which the bank is governed, the directors 
cannot bind the bank by acts done outside of the regu- 
lar business. Thus, they cannot increase or reduce the 
amount of capital stock, or wind up the business, or 
sell its property so as to disable it from carrying on its 
business. These and all similar matters are to be de- 
termined by the shareholders, unless the Legislature has 
provided otherwise. 1 

Term of Office. — The charters of banks and general 
banking laws commonly prescribe that the directors 
shall be elected for a certain definite term, usually one 
year. But it is not understood that the effect of such 
a provision is to require a director to serve for the whole 
term for which he is elected, and to prohibit him from 
resigning during such term. Accordingly, it was held 
in a recent case that a director of a national bank might 
resign at any time during the year. And the court said 
that the apparent purpose of the provision of the na- 
tional banking laws in regard to the term of office is to 
make it conform to the time of the new election, and 
not to absolutely require every director to serve the full 
term. 2 

The resignation of a director should be tendered to 
the board, and not to the shareholders. As the presi- 
dent is the head of the board, the resignation may be 
tendered to him. 3 

1 Percy v. Millaudon, 8 Martin (N. S.), 68; Bank Commission- 
ers v. Bank of Brest, i Hairing. Ch. (Mich.), 106 ; Gibson v. Gold- 
thwaite, 7 Ala., 281. 

2 Movius v. Lee, 30 Fed. Rep., 298. 



DIRECTORS. 133 

Can Act Only As a Board. — The directors must 
act as a board, and not singly. And the mere fact that 
persons are directors will not enable them to bind the 
bank by acts done independently of the other members 
of the board. Oftentimes, it is true, a single director 
when acting alone may represent the bank in various 
matters ; but in such case his power is not simply in 
virtue of his office — a power inherent in the office of 
director — but is derived from another circumstance, viz., 
that he has been authorized by the board to act as the 
agent of the bank in such matters. In a recent case in 
the Supreme Court of Kansas it was said : ' ' The elec- 
tion of an individual as a director does not constitute 
him an agent of the corporation with authority to act 
separately and independently of his fellow members. 
It is the board duly convened and acting as a unit that 
is made the representative of the association. The as- 
sent or determination of the members of the board 
acting separately and individually is not the assent of 
the corporation. The law proceeds upon the theory 
that the directors shall meet and counsel with each 
other, and that any determination affecting the asso- 
ciation shall be arrived at and expressed only after a 
consultation at a meeting of the board attended by at 
least a majority of its members." x 

This principle is elementary in the law of corpora- 
tions, and is sustained by a great number of adjudi- 
cations. 

Cannot Exclude Co-Director from Access to 
Bank's Records. — Every director has the right to 
know how the affairs of the bank are conducted, and 

1 Nat'l Bank v. Drake, 35 Kans., 564. 



134 PRATTS' MANUAL OF BANKING LAW. 

about the action of his co-directors in their management 
of the institution ; and, therefore, the majority cannot 
exclude one of their number from access to the books 
and records of the bank. Accordingly, it has been held 
that a by-law which was aimed at a single member, and 
was intended to prevent him inspecting the discount 
book, was invalid ; and it was held to be no defense to 
the action of the majority that they considered the par- 
ticular director hostile to the institution and its in- 
terests. 1 

Presumed to Know Condition of Bank. — It is 

a presumption of law that the directors have a knowl- 
edge of the transactions, business, and condition of the 
bank, which presumption is conclusive upon them, and 
against the existence of which, as a matter of fact, no 
testimony will be received. It being their duty to have 
such knowledge, they will not be permitted to plead 
ignorance, and thereby profit by their neglect of duty. 
Accordingly, where a director had sold his stock at a 
time when the bank was insolvent, and had taken in 
payment a check upon the bank drawn by a person who 
had no funds to his credit, it was held that he was pre- 
sumed to know the condition of the bank, and also the 
fact that the drawee of the check had no funds on 
deposit. The court said : ( ' While we assume, as a 
matter of fact, that the defendant knew nothing of the 
condition or management of said bank, and nothing of 
the condition of Herman's account with the bank, yet 
still as a matter of law we think we must presume that 
he knew all about these matters. He was a director 
and the vice-president of the bank, and it was his duty 

1 People v. Throop, 12 Wend., 183. 



DIRECTORS. I35 

to have such knowledge, and therefore the law will con- 
clusively presume that he had it. He cannot now, as 
against the interests of the bank and its stockholders 
and perhaps its creditors, be allowed to plead ignorance 
and innocence, and thereby profit by his own want of 
knowledge and by his own failure to do his duty as an 
officer of the bank. Such would be against both morals 
and law. Of course, we do not hold that a director is 
bound to know everything that transpires in a bank, 
and at the very time when it occurs. But we do hold 
that a director, having personal and private dealings 
with his bank, is bound to know (so far as the same 
affects his personal dealings) the general condition and 
management of his bank and everything of importance 
that occurs therein, either at the time it occurs or soon 
thereafter." 1 

likewise, in United Society of Shakers v. Underwood 2 
it was held by the Court of Appeals of Kentucky that 
the directors of the bank were presumed to have had 
notice that bonds left with the bank as a special deposit 
had been sold by the bank officers and the money ap- 
plied to the uses of the bank. The court said : ' ' It is 
the duty of bank directors to use ordinary diligence to 
acquaint themselves with the business of the bank, and 
whatever information might be acquired by ordinary 
attention to their duties they may, in controversies with 
persons transacting business with the bank, be presumed 
to have. They cannot be heard to say that they were 
not apprised of facts shown to exist by the ledger, books, 
accounts, correspondence, reconcilements, and state- 
ments of the bank, and which would have come to their 

1 German Savings Bank v. Wulfekuhler, 19 Kans., 60. 

2 9 Bush., 609. 



I36 PRATTS* MANUAL OF BANKING LAW. 

knowledge except for their gross neglect or inattention. 
It is not necessary in many cases to show directly that 
the directors actually had their attention called to the 
mismanagement of the affairs of the bank or the mis- 
conduct of the subordinate officers. It is sufficient to 
show that the evidences of the mismanagement or mis- 
conduct were such that it must have been brought to 
their knowledge unless they were grossly negligent or 
willfully careless in the discharge of their duties. If it 
shall turn out upon the trial of these actions that the 
ledgers, books, etc. , of the bank showed that the special 
deposits of these appellants were being sold, and that 
this fact would have been discovered by appellees by 
the use of ordinary diligence, then the presumption of 
actual knowledge will arise." 

Presumption Exists Only in Favor of Innocent 
Third Parties. — But this rule is founded in public 
policy, and its object is to protect innocent parties deal- 
ing with the bank and having an interest therein; it 
will not be upheld in favor of one who does not occupy 
the position of an innocent third party in interest. Ac- 
cordingly, it has been held that an officer of a bank who 
had abstracted and misapplied some of its funds could 
not set up this presumption in order to show a ratifica- 
tion of his acts by the directors. For to have permitted 
him to do this would have been to turn a presumption, 
intended to enforce fidelity and watchfulness of the 
directors, into an instrument of injury and destruction 
to the bank and its stockholders. 1 

'When Bank Is Charged with Knowledge of Di- 
rector. — The general rule of agency that notice to the 

1 First Nat'l Bank v. Drake, 29 Kans., 311. 



DIRECTORS. 137 

agent in the course of the transaction in which he is 
acting for his principal of facts affecting the nature and 
character of such transaction is constructive notice to 
the principal, applies in the case of a bank or other com- 
pany or corporation, as well as in the case of an indi- 
vidual. But the rule requires that in order to charge 
the bank with the knowledge of the officer he must be 
acting as its agent in the business to which this knowl- 
edge relates ; the mere fact that he is an officer will not 
affect the bank with his knowledge. And in general, 
if the knowledge of the officer was acquired in his official 
capacity, the bank also is presumed to have it ; but if it 
was acquired as any private person may have acquired 
it, the bank is not chargeable. 1 

From these principles it follows that the bank cannot 
be affected by the knowledge of a director unless he is 
its representative in the business to which the knowl- 
edge relates, or unless he should communicate such 
knowledge to the board or to some other authorized 
agent of the bank. The bank will not be charged with 
his merely private knowledge, any more than it would 
with the knowledge of an entire stranger. 2 For, as we 
have seen elsewhere in this chapter, the directors can 
act only as a board, and a director as such has no inde- 
pendent powers of business. Thus, for instance, the 
mere fact that a director has knowledge that paper 
offered for discount is tainted with fraud will not affect 
the right of the bank to recover thereon ; but if the 

1 Nat'l Bank v. Norton, 1 Hill, 572 ; Washington Bank v. Lewis. 
22 Pick., 24 ; Atlantic State Bank v. Savery, 82 N. Y„, 291. 

2 Nat'l Bank v. Norton, supra; United States Bank v. Davis, 2 
Hill, 451; Westfield Bank v. Cornen, 37 N. Y., 320; First Nat'l 
Bank v. Gifford, 47 Iowa, 575. 



I38 PRATTS' MANUAL OF BANKING LAW. 

director who has such knowledge acts for the bank in 
discounting the note, then his act is the act of the bank, 
and the bank will be held to have notice of all facts with 
which he is acquainted. 1 

Delegation of Authority to Subordinate Agen- 
cies. — The directors do not exercise a delegated author- 
ity in the sense in which the rule applies to agents and 
attorneys, who exercise the powers specially conferred 
on them and no others ; and they may delegate many 
of their powers to inferior agents and to committees 
composed of a part only of the members of the board. 2 
Thus, they may vest the power to make discounts in a 
committee consisting of only a few of the directors, or 
of a few of the directors and the principal executive 
officer or officers of the bank. 3 So they may delegate 
to a committee of their number authority to mortgage 
or sell the property of the corporation, 4 or to pay its 
debts, 5 or to borrow money and obtain discounts on its 
behalf. 6 And upon the same principle it was held, in 
the case of a banking corporation whose charter de- 
clared that its powers should be exercised by a board of 
twenty-three members, that a by-law authorizing a 
quorum of five directors, including the president, to 
transact ordinary business was a valid regulation. 7 And 

r Nat'l Security Bank v. Cushman, 121 Mass., 490. 

2 Hoyt v. Thompson, 19 N. Y., 207 ; Burrill v. Nahant Bank, 2 
Mete. (Mass.), 163. 

3 Nat'l Security Bank v. Cushman, supra. 

* Hoyt v. Thompson, supra ; Burrill v. Nahant Bank, supra. 

s Ex parte Conway, 4 Pike, 350. 

6 Ridgway v. Farmers' Bank, 12 S. & R., 256 ; Iyeavitt v. Yates, 

Sandf. Ch., 134. 

7 Hoyt v. Thompson, supra. 



DIRECTORS. i 139 

in this case the court, after showing that the directors 
might delegate to subordinate agents or agencies author- 
ity to transact the ordinary business of the corporation, 
said, in regard to the by-law in question : "It was in 
substance and effect a regulation which constituted a 
subordinate agency to conduct the ordinary business of 
the corporation. The persons composing the agency 
would change according as the quorum of five or more 
directors attending the meetings might be constituted 
of different individuals. But if the board could dele- 
gate the power of transacting business to five or more 
individuals named, no doubt exists that the same author- 
ity might be imparted to a shifting quorum composed of 
the same number." 

The Degree of Care Required of Directors. — As 

to the degree of care required of directors in their man- 
agement of the bank, it is generally stated to be such 
reasonable care as men usually exercise in the manage- 
ment of their own affairs of a similar nature. 1 Perhaps 
no clearer exposition of the law on this point has been 
given than that found in the opinion delivered by Karl, 
J., in the case of Hun v. Cary et al. That was a case 
against the trustees of a savings bank ; but as the rela- 
tion of such officers to their institutions is said to be 
the same as that of directors to other corporations 2 (and 
was so assumed in the opinion), the principles laid down 
are equally applicable to the directors of a commercial 
bank. Among other things, it was said by the court : 

1 Hun v. Cary, 82 N. Y., 65 ; Ackerman v. Halsey, 37 N. J. Bq., 
356; Williams v. Halliard,* 38 N. J. Bq., 373; Percy v. Millau- 
don, 3 La., 68 : United Society of Shakers v. Underwood, 9 Bush. v 
609. 

2 Williams v. Halliard, swbra. 



I40 PRATTS' MANTTAI, OF BANKING UW. 

1 ' The relation existing between the corporation and its 
trustees is mainly that of principal and agent, and the 
relation between the trustees and the depositors is simi- 
lar to that of trustee and cestui que trust. The trustees 
are bound to observe the limits placed upon their powers 
in the charter; and if they transcend such limits and 
cause damage, they incur liability. If they act fraudu- 
lently and do a willful wrong, it is not doubted that they 
may be held for all the damage they cause to the bank 
or its depositors. But if they act in good faith within 
the limits of powers conferred, using proper prudence 
and diligence, they are not responsible for mere mis- 
takes or errors of judgment. That the trustees of such 
corporations are bound to use some diligence in the dis- 
charge of their duties cannot be disputed. All the 
authorities hold so. What degree of care and diligence 
are they bound to exercise ? Not the highest degree, 
not such as a very vigilant or extremely careful person 
would exercise. If such were required, it would be 
difficult to find trustees who would incur the responsi- 
bility of such trust positions. It would not be proper 
to answer the question by saying the lowest degree. 
Few persons would be willing to deposit money in sav- 
ings banks, or to take stock in corporations, with the 
understanding that the trustees or directors were bound 
only to exercise slight care, such as inattentive persons 
would give to their own business, in the management 
of the large and important interests committed to their 
hands. When one deposits money in a savings bank 
or takes stock in a corporation, thus divesting himself 
of the immediate control of his property, he expects, 
and has the right to expect, that the trustees or direct- 
ors, who are chosen to take his place in the management 



DIRECTORS. I4I 

and control of his property, will exercise ordinary care 
and prudence in the trusts committed to them — the 
same degree of care and prudence that men prompted 
by self-interest generally exercise in their own affairs. 
When one voluntarily takes the position of trustee or 
director of a corporation, good faith, exact justice, and 
public policy unite in requiring of him such a degree of 
care and prudence, and it is a gross breach of duty — 
crass a negligentia — not to bestow them. ' ' 1 

It is not to be supposed that the degree of care re- 
quired of bank directors is the same, and no greater, 
than that required of the directors of every other kind of 
corporation. The degree of care due from persons act- 
ing in behalf of others depends upon the objects to 
which the care is to be applied. Thus (to use an old 
and familiar illustration) the degree of care which would 
be sufficient where the object is a quantity of iron 
might be wholly insufficient where the object is a jewel. 
So, the affairs of a bank would seem to require a higher 
degree of care than the affairs of many other corpora- 
tions, such, for instance, as turnpike, canal, or even 
manufacturing corporations. To banks are confided the 
funds of other persons, and their relations to the public 
are those of the greatest confidence and trust. Then, 
the assets of a bank are in such form that they may be 
readily misappropriated, and present extraordinary 
temptations to the persons who have them under their 
immediate control. The general test is the same in all 
cases, viz., that care which men of common prudence 
take of their own concerns ; but it is quite plain that a 
prudent man would bestow a higher degree of care and 

1 See also Ackerman v. Halsey, 37 N. J. Eq., 356 ; Williams v. 
Halliard, 38 N. J. 3q., 373- 



142 PRATTS' MANUAL OF BANKING LAW. 

more attention upon the affairs of a bank than he would 
upon the affairs of a corporation the property of which 
is not so easily misapplied and the business of which 
does not need such constant supervision. 

Must Exercise Ordinary Skill and Judgment. — 

The directors must also exercise ordinary skill and judg- 
ment. In the case of Hun v. Cary * it was said : ' ' Iyike 
a mandatary, to whom he has been likened, he [a di- 
rector] is bound not only to exercise proper care and 
diligence, but ordinary skill and judgment. As he is 
bound to exercise ordinary skill and judgment, he can- 
not set up that he did not possess them. When dam- 
age is caused by his want of judgment, he cannot excuse 
himself by alleging his gross ignorance. One who vol- 
untarily takes the position of director and invites con- 
fidence in that relation undertakes, like a mandatary, 
with those whom he represents or for whom he acts, that 
he possesses at least ordinary knowledge and skill, and 
that he will bring them to bear in the discharge of his 
duties. Such is the rule applicable to public officers, to 
professional men, and to mechanics, and such is the rule 
which must be applicable to every person who under- 
takes to act for another in a situation or employment 
requiring skill and knowledge ; and it matters not that 
the service is to be rendered gratuitously. ' ' 

This case affords an excellent illustration of what will 

1 82 N. Y., 65. There are judicial dicta to the effect that direct- 
ors are not liable for a mistake of judgment, however gross, pro- 
vided the mistake is honest and the acts are fairly within the 
scope of the powers and discretion confided to the managing 
body. But the rule stated in the text is thought to be the better 
one ; certainly it is the safest for the directors to adopt as their 
guide. 



DIRECTORS. I43 

amount to a failure to exercise reasonable skill and 
judgment. The assets of the bank at the time of the 
action complained of amounted to something less than 
$70,000 (the amount due to the depositors), and the 
bank was in fact insolvent. But the trustees, with a 
view to improving the financial condition of the insti- 
tution by increasing its deposits, purchased a lot for 
$29,250 and agreed to erect a building thereon at a cost 
of $27,000, it being thought that an imposing building 
would be a good advertisement of the bank, and by 
attracting attention and inspiring confidence would draw 
deposits. A receiver was subsequently appointed, and 
at the time of his appointment this lot, and other assets 
which produced less than $1,000, constituted the whole 
property of the bank ; and afterward the lot and build- 
ing were lost by a mortgage foreclosure. The action 
was brought to recover from the trustees the damages 
caused by the improper investment of the funds of the 
bank. There was no question but that the trustees 
were honest in their intention ; the sole point was 
whether under the circumstances the purchase was such 
as the trustees, in the exercise of ordinary prudence, 
skill, and care, could make ; and it was held that the 
finding of the jury against them ought to be sustained. 
One of the points made by the defense was that the 
price agreed on was not more than the lot was worth at 
the time of the purchase. But in reply to this the court 
said : "It matters not that the trustees purchased this 
lot for no more than a fair value, and that the loss was 
occasioned by the subsequent general decline in the 
value of real estate. They had no right to expose 
their bank to the hazard of such a decline. If the pur- 
chase was an improper one when made, it matters not 



144 PRATTS' MANUAL OP BANKING LAW. 

that the loss came from the unavoidable fall in the value 
of the real estate purchased. The jury may have found 
that it was grossly careless for the trustees to lock up 
the funds in their charge in such an investment, where 
they could not be reached in any emergency which was 
likely to arise in the affairs of the crippled bank." 

May Commit Immediate Management to Exec- 
utive Officers. — As a general rule, the directors are 
not deemed guilty of negligence when they commit the 
immediate management of the affairs of the bank to the 
principal executive officers. It is not expected that the 
directors will devote their whole time and attention to 
the bank's business and guard it from injury by con- 
stant superintendence. Moreover, they are commonly 
persons who are not professional bankers, and whose 
acquaintance with the banking business is limited ; and 
in order to insure the success of the institution, they 
must, in a large measure, intrust the conduct of its 
affairs to officers known to possess the requisite knowl- 
edge and skill. A high degree of care in the selection 
of the officers is, of course, necessary ; but after officers 
known to be competent and skillful have been chosen, 
the directors may trust them with the immediate man- 
agement and control. Still it is not to be understood 
that they may turn over to such officers the absolute 
direction of the entire business. It is their duty to ex- 
ercise a general control and supervision, and ordinarily 
this is all that is expected of them. But circumstances 
may arise which will impose upon them a higher degree 
of care. Thus, if they become acquainted with any 
fact calculated to put prudent men on their guard — as 
that the officers are violating the law, are making in- 



DIRECTORS. 145 

judicious loans, or are misappropriating the funds of the 
bank — a degree of care commensurate with the evil to 
be 'avoided is due from them ; and a failure to bestow 
such care will be considered gross negligence, for which 
they may be made individually responsible. 

This appears to be the rule established by the most 
authoritative decisions, some of which are cited in the 
note. 1 

Liability for Violation of Law. — Independently 
of any statutory provision, the directors will be liable 
for losses resulting to the bank by reason of their viola- 
tion of the laws by which the bank is governed. Thus, 
they will be liable if they invest the bank's funds in 
securities of a kind that the law does not permit the 
bank to make loans upon. 2 So, the directors of a national 
bank will be required to make good any loss occasioned 
by their violation of the provision limiting the amount 
of loans to one person to one- tenth of the capital stock. 3 
And in such cases it is not essential, in order to charge 
them with liability, to show that they acted fraudulently 
or that they derived any benefit from the violation of 
law ; it is sufficient that there was a culpable lack of 
prudence or failure to exercise with ordinary care their 
functions as quasi trustees of the funds of the bank by 
reason of which loss was sustained." 1 But this liability 



1 Percy v. Millaudon, 8 Martin (N. S.), 6S ; Ackerman v. Halsey, 
37 N. J. Bq., 356 ; Williams v. Halliard, 38 N. J. Eq., 373 ; Dunn's 
Adm'r v. Kyle's Ex'r, 14 Bush., 134 ; Movius v. Lee, 30 Fed. Rep., 
298. 

2 Williams v. McDonald, 42 N. J. Bq., 392. 

3 Witters v. Sowles, 31 Fed. Rep., 1. 

4 Williams v. McDonald, supra. 

10 



146 PRATTS' MANUAL OF BANKING UW. 

will not extend to directors who did not authorize or 
participate in the making of such loans. 1 

Not Liable for Frauds of Co-Director. — In a late 
case in the United States Circuit Court for the northern 
district of New York it was held that the directors of a 
bank were not liable for loss occasioned to the bank 
through the frauds of a co-director in which they had 
no part, and which were perpetrated without their con- 
nivance or knowledge ; and that it was not sufficient to 
charge them with liability that the frauds might have 
been prevented by the exercise on their part of a proper 
degree of supervision over the affairs of the bank. 2 This 
decision appears to have been based on sound principles, 
and is supported by adjudications in several cases where 
the directors of other kinds of corporations were sought 
to be charged with liability for the frauds of one of their 
associates. 

The President. — The president of the board of direct- 
ors is the presiding officer of the board, but otherwise 
his ex officio powers are not greater than those of any 
other director, except that, as the head of the board, he 
may bring suit in behalf of the bank, and in proceed- 
ings against the bank legal process may be served upon 
him. 3 Where he exercises a larger authority, it is not 
because such authority is inherent in the office, but 
because the board has, either expressly or impliedly, 

1 Witters v. Sowles, 31 Fed. Rep., 1 ; Williams v. McDonald, 42 
N. J. Eq., 392. 

2 Movius v. Lee, 30 Fed. Rep., 298. 

3 Hodges' Bx'r v. First Nat'l Bank, 22 Gratt, 58; First Nat'l 
Bank v. Kimberlands, 16 W. Va., 555. 



THE CASHIER. 147 

conferred it upon him. It is impossible, therefore, to 
enumerate any powers pertaining to the office of presi- 
dent, because these must depend in all instances upon 
the circumstances of the case. His powers may range all 
the way from those of a simple director to those of head 
officer and general manager of the bank, having author- 
ity to represent it in all matters of business as fully as 
the board itself. 



CHAPTER II. 



THE CASHIER. 

The cashier is the executive financial officer of the 
bank. It is by him or under his direction that its 
moneys are received and paid out, its debts collected 
and paid, and its commercial securities received or trans- 
ferred. And although some of these duties may be per- 
formed by tellers and other subordinate officers, these 
act under his direction and are merely the instruments 
by which designated portions of his various functions 
are performed. The ordinary duties of the cashier have 
been defined by the Supreme Court of the United States 
as follows : ' ' His ordinary duties are to keep all the 
funds of the bank, its notes, bills, and other choses in 
action to be used from time to time for the ordinary and 
extraordinary exigencies of the bank. He usually re- 
ceives directly, or through the subordinate officers of 
the bank, all moneys and notes of the bank, delivers up 
all discounted notes and other securities when they have 
been paid, draws checks to withdraw the funds of the 



148 PRATTS' MANUAL OF BANKING LAW. 

bank where they have been deposited, and as the execu- 
tive officer of the bank transacts most of its business. ' ' l 

Power to Indorse and Transfer Securities. — 

As the chief financial officer and agent of the bank the 
cashier has virtute officii the power to indorse and trans- 
fer negotiable securities belonging to the bank, and no 
special authority for this purpose is required. 2 And he 
is the only officer of the bank who has authority ex 
officio to perform this duty. 3 

Power Not Affected by Statutes. — Provisions in 
bank charters and banking statutes to the effect that the 
contracts and engagements of the bank shall be signed 
by some other designated officer of the bank as well as 
by the cashier have uniformly been held not to compre- 
hend the drawing and indorsing of commercial paper. 
A bank charter provided "that all bills, bonds, and 
notes and every other contract or engagement on behalf 
of the corporation shall be signed by the president and 
countersigned by the cashier ; and the funds of the cor- 
poration shall in no case be liable for any contract or 
engagement unless the same shall be signed and counter- 
signed as aforesaid. ' ' This provision was held by the 
Supreme Court of the United States not to apply to a 
check drawn upon another bank ; and, accordingly, the 

1 United States v. City Bank of Columbus, 21 How., 356. See 
also Merchants' Bank v. State Bank, 10 Wall., 604 ; Matthews v. 
Mass. Nat'l Bank, 1 Holmes, 396 ; Cochecho Nat'l Bank v. Has- 
kell, 51 N. H., 116. 

2 Fleckner v. Bank of United States, 8 Wheat., 338; Wild v. 
Passamaquoddy Bank, 3 Mason, 505 ; City Bank v. Perkins, 29 
N. Y., 554- 

3 Smith v. tvawson, 18 W. Va., 212. 



THE CASHIER. I49 

bank was made liable on a check signed only by the 
cashier. 1 A similar construction has been placed by the 
New York courts upon the provisions of the general 
banking law of that State that ' ' contracts made by any 
association, and all notes and bills by them issued and 
put in circulation as money, shall be signed by the pres- 
ident or vice-president and cashier thereof. " 2 In Barnes 
v. Ontario Bank Allen, J., discussing this question, 
said : ' ' The whole business of a bank is confided in the 
first instance to a board of directors, and they usually 
confer the power to transact its most important and 
daily financial operations to their cashier and teller. 
The cashier is usually intrusted with all the funds of a 
bank. He receives directly all moneys and notes. He 
delivers up all discounted notes on payment. He draws 
checks and drafts, and, in short, is the executive officer 
through whom and by whom the whole moneyed opera- 
tions of the bank, in paying or receiving debts or dis- 
charging them, are to be conducted. It is his duty 
to apply the negotiable funds as well as the money of 
the bank to the payment of its debts. In receiving 
deposits did the Legislature ever contemplate that the 
depositor must wait for the president or vice-president 
to sign with the cashier a mere certificate or acknowl- 
edgment of the money by the cashier ? The answer to 
this question is to me plain and conclusive. The power 
to receive must be a power to acknowledge the recep- 
tion, and one follows as a necessary incident to the 



1 Mechanics' Bank v. Bank of Columbia, 5 Wheat., 326. 

2 Safford v. Wyckoff, 4 Hill, 442 ; Barnes v. Ontario Bank, 19 
N. Y., 152. 



I50 PRATTS' MANUAL OF BANKING LAW. 

other. ' ' I^ike statutes in Illinois, * Indiana, 2 Wisconsin, 3 
and North Carolina 4 have received the same construc- 
tion. And in Georgia it was held that a provision in a 
bank charter to the effect that all contracts and engage- 
ments of the bank should be signed by the president and 
countersigned by the cashier could not have been in- 
tended to apply to those contracts which according to 
commercial law and usage appertain to the office of 
cashier, such as drawing or indorsing bills of exchange, 
checks, and drafts. 5 

Can Transfer Only Negotiable Securities and in 
Ordinary Course of Business. — But the cashier's 
power to transfer extends only to transfers of the negotia- 
ble securities of the bank made in the ordinary course of 
business. He has no inherent authority to sell or dis- 
pose of the non-negotiable property of the bank, as, for 
instance, mortgages held by it. 6 And his indorsement 
and transfer of negotiable securities will not be binding 
upon the bank unless made in the usual course of busi- 
ness. Thus, it has been held that the cashier could not 
pledge the securities of the bank for the payment of an- 
tecedent debts. 7 So, where a cashier, when his bank 
was insolvent and was about to close its doors, trans- 
ferred some of its bills receivable to a customer in part 



1 State Bank v. Kain, 1 Breese, 45. 

2 Jones v. Hawkins, 17 Ind., 550. 

3 Rockwell v. Blkhorn Bank, 13 Wis., 731. 

4 State Bank v. Locke, 4 Dev., 533. 

5 Merchants' Bank v. Central Bank, 1 Kelly, 430. 

6 Hoyt v. Thompson, 5 N. Y., 320 ; Leggett v. N. J. Man. Co., 
Sax. Ch., 542 ; Holt v. Bacon, 25 Miss., 567. 
7 State Bank v. Davis, 50 How. Pr., 447. 



THK CASHIER. 151 

payment of his deposit, it was held that the cashier in 
so doing was acting in excess of his authority. 1 

Drawing or Indorsing Paper as " Cashier." — 

When paper is drawn or indorsed in the name of an 
individual, with the addition of the word "cashier," 
but without any bank being specified, parol evidence is 
admissible to show that when the paper was made or 
transferred such person was the cashier of the bank by 
which or through which title to the paper is claimed, 
and that in signing or indorsing the paper he was act- 
ing as the agent of such bank. 2 In the case of Bank of 
Genesee v. Patchin Bank 3 S. B. Stokes, the cashier of 
the Patchin Bank, sent to the Bank of Genesee to be 
discounted a bill of exchange paj^able to the order of 
' ' S. Bo Stokes, Cas. , ' ' indorsed by him with the same 
addition to his signature and inclosed in a letter dated 
at the banking-house and signed "S. B. Stokes, Cas." 
It was held that these circumstances imported that the 
indorsement was that of the Patchin Bank in the regu- 
lar course of business, and not that of S. B. Stokes 
individually. Denio, J., said: "The question was 
whether the indorsement of Stokes was private or offi- 
cial. In the absence of any evidence to connect the 
bill with the defendant's bank, he would be regarded as 
the payee and the indorser individually, and the abbre- 
viation affixed to his name would be considered as a 
descriptio persona. But when it has been shown that 
he was the defendant's cashier, the presumption would 
be that a note payable in that form was the property of 

J Lamb v. Cecil, 28 W. Va., 653. 

2 Baldwin v. Bank of Newbury, 1 Wall., 234 

3 19 N. Y., 312. 



152 PRATTS' MANUAL OF BANKING I^AW. 

the bank. ' ' likewise, in Bank of New York v. Bank 
of Ohio x it was held that a draft drawn payable to the 
order of ' ' D. C. Converse, Esq. , Cashier, ' ' who was the 
cashier of the defendant, was to be regarded as payable 
to the bank of which he was such officer. 

Power to Certify Checks. — Another power which 
pertains to the office of cashier is that of certifying 
checks. This power is incidental to his authority to re- 
ceive the deposits of customers and make payment to 
them. 2 In Cooke v. State National Bank Church, C. 
J. , said : ' ' The cashier has a right, by virtue of his 
office, to make this certificate when the drawer has funds. 
He is the custodian of the funds of the bank and of the 
books ; he receives money and gives vouchers therefor ; 
and whether upon receiving a check he pays it in money 
or gives the holder a certificate of deposit or draft, or a 
certificate that he will retain sufficient of the money 
standing to the drawer's credit to pay it when presented, 
he is in either case acting within the line of his duty 
and within scope of the authority which necessarily 
attaches to his office. ' ' 

In the larger banks this duty is usually performed by 
the paying teller. But the fact that the teller has been 
authorized to certify does not of itself affect the right 
of the cashier to do the same thing. For the teller acts 
under the direction of the cashier, and in this, as in 
other matters, is merely the instrument by which the 
cashier performs a part of the functions of his office. 3 

2 29N. Y., 619. See also First Nat'l Bank of Angelica v. Hall, 
44 N. Y., 395 ; Folger v. Chase, 18 Pick., 63. 

2 Merchants' Bank v. State Bank, 10 Wall., 604 ; Cooke v. State 
Nat'l Bank, 52 N. Y, 96. 

3 Merchants' Bank v. State Bank, supra. 



THE CASHIER. 1 53 

Power to Borrow Money. — The cashier, in virtue 
of his general employment, and without any special 
delegation of authority for the purpose, may borrow 
money for the bank. His power in this respect is a 
necessary incident to his duty, as financial agent of the 
bank, of paying its debts and meeting its obligations. 1 
And having the power to borrow, he has necessarily the 
power to bind the bank for the repayment of the money, 
and to execute and deliver the necessary assurances or 
undertakings therefor in any form not forbidden by law. 2 

Restriction of Powers Does Not Affect Third 
Persons Without Notice. — The directors ma}-, of 
course, restrict the powers of the cashier if they see fit ; 
but persons dealing with the bank in good faith have 
the right to presume that the cashier has the customary 
authority of such an officer, and they will not be affected 
by any limitation of his powers unless they have" notice 
thereof. 3 Thus, persons dealing with him may assume 
that he is authorized to indorse and transfer the nego- 
tiable securities of the bank for its use, and any one 
taking commercial paper transferred by him, without 
notice of any restriction upon his authority in this re- 
spect, will have a good title thereto as against the bank. 4 

Powers Are Limited. — But the powers which the 
cashier may exercise virtnte officii are only such as nat- 
urally pertain to the ordinary financial operations of the 

1 Barnes v. Ontario Bank, 19 N. Y., 152 ; Coats v. Donnell, 94 
N. Y., 168 ; Donnell v. Lewis Co. Savings Bank, 80 Mo., 165. 

2 See cases cited in preceding note. 

3 Cooke v. State Nat'l Bank, 52 N. Y., 96 ; L,oring v. Brodie, 134 
Mass., 453. 

4 Bank of the State v. Wheeler, 21 Ind., 90. 



154 PRATTS' MANUAL OF BANKING LAW. 

bank. Accordingly, it has been held that he cannot 
bind the bank by his assurance to a person about to in- 
dorse a note that such person will incur no risk or re- 
sponsibility by reason of such indorsement. 1 So, he has 
no power to release a surety from liability upon paper 
owned by the bank. 2 So, his powers do not extend to 
indemnifying an officer for levying upon property. 3 Nor 
can he bind the bank by a contract for the purchase or 
sale of real estate, 4 or by the assignment or release of a 
mortgage, 5 or by a sale of the safe and fixtures of the 
bank. 6 In short, the only powers inherent in the office 
of cashier are those which are naturally connected with 
or incidental to the duty of receiving and paying out 
the. money of the bank and taking charge of its funds 
and securities. 

Cannot Make Discounts. — The cashier has no 
authority to make discounts, or to bind the bank by 
contracts in reference thereto. This is a matter which 
requires the action of the board of directors, unless they 
have delegated the power to some subagency. 7 

Liable if He Transcends His Powers. — Without 
some authority to do so, either express or implied, he 
will be liable if he transcends the known powers of a 



1 United States Bank v. Dunn, 6 Peters, 51. 

2 Daviess County Savings Association v. Sailor, 63 Mo., 24; 
Ecker v. First Nat'l Bank, 59 Md., 291. 

3 Watson v. Bennett, 12 Barb., 196. 

4 Winsor v. Lafayette County Bank, 18 Mo. App., 665. 

5 Martin v. Webb, no U. S., 7. 

6 Asher v. Sutton, 31 Kans., 286. 

7 United States Bank v. Dunn, supra; Martin v. Webb, supra. 



The cashier. 155 

cashier and loss results to the bank. Thus, where a 
cashier assumed to change the securities of the bank 
without the consent of the directors, his bondsmen were 
held liable for the loss thereby sustained by the bank. 1 

Cashier May Have Larger Powers. — We have 
been speaking of only those powers which ordinarily 
belong to the office of cashier, and which such an officer 
exercises merely virtute officii. But very often the 
cashier has much greater powers than these ; in many 
instances he has almost the entire management of the 
bank, and exercises the powers of a general managing 
agent. That the directors may clothe him with such 
authority is unquestionable. Nor is it essential to his 
power to bind the bank in matters beyond the scope of 
his ordinary functions that the directors should have 
expressly conferred upon him such an authority. 2 ' ' His 
authority may be by parol and collected from circum- 
stances. It may be inferred from the general manner 
in which for a period sufficiently long to establish a set- 
tled course of business he has been allowed without 
interference to conduct the affairs of the bank. It may 
be implied from the conduct or acquiescence of the cor- 
poration, as represented by the board of directors. 
When during a series of years or in numerous business 
transactions he has been permitted, without objection 
and in his official capacity, to pursue a particular course 
of conduct, it may be presumed, as between the bank 
and those who in good faith deal with it upon the basis 

1 Barrington v. Bank of Washington, 14 Sergt. & R., 405. 

2 Martin v. Webb, no U. S., 7 ; City Bank of New Haven v. 
Perkins, 4 Bosw., 420 ; Caldwell z\ Nat'l Mohawk Bank, 64 Barb., 
333- 



156 PRATTS' MANUAL OF BANKING LAW. 

of his authority to represent the corporation, that he 
has acted in conformity with instructions received from 
those who have the right to control its operations. ' ' * 

Must Exercise Reasonable Skill and Care. — In 

the performance of his duties as such officer the cashier 
is bound to the exercise of reasonable skill and ordinary 
care and diligence ; and if, by reason of his failure to 
exercise such skill, care, or diligence, loss results to the 
bank, he and his bondsmen will be liable therefor. 2 And 
the usual condition of a cashier's bond that "he shall 
well and truly execute the duties of cashier ' ' is violated 
by his neglect to use due skill and care, as well as by 
any fraudulent or dishonest act. 3 In Minor v. Mechan- 
ics' Bank Justice Story, delivering the opinion of the 
United States Supreme Court, said : ' ' The condition 
that Minor shall * well and truly execute the duties of 
cashier ' of the bank is said to be merely a stipulation 
for honesty in the discharge of the duties, and not for 
skill, capacity, or diligence. We are of a different 
opinion. ' Well and truly to execute the duties of the 
office ' includes not only honesty, but reasonable skill 
and diligence. If the duties are performed negligently 
or unskillfully, if they are violated from want of capac- 
ity or want of care, they can never be said to be 
' well and truly executed. ' The operations of a bank 
require diligence, with fitness and capacity, as well as 
honesty, in its cashier ; and the security for the faithful 
discharge of his duties would be utterly illusory if we 

^er Harlan, J., in Martin v. Webb, no U. S., 7. 

2 Minor v. Mechanics' Bank, 1 Peters, 46 ; Commercial Bank v. 
Ten Eyck, 48 N. Y., 305. 

3 Minor v. Mechanics' Bank, supra; Barrington v. Bank of 
Washington, 14 Sergt. & R., 405. 



THE CASHIER. 157 

are to narrow down its import to a guaranty against 
personal fraud only. ' ' 

And where the condition of a cashier's bond was 
that he should well and truly perform the duties of 
cashier to the best of his ability, it was held by the Su- 
preme Court of Pennsylvania that this was an under- 
taking that he would perform such duties with compe- 
tent skill and ability} 

When Liable for Act or Neglect of Subordi- 
nate. — The cashier cannot be rendered liable for the 
wrongful or dishonest act of any of his subordinates 
unless his own neglect or collusion has caused or aided 
it. 2 As to how closely he must inspect the work of 
those under him will depend in a great measure upon 
the amount of business done by the bank and the meth- 
ods of transacting it. The duties of the cashier in this re- 
spect were very clearly set forth by the Court of Appeals 
of Kentucky in the case of Batchelor v. Planters' Na- 
tional Bank of Louisville. The court said, among other 
things : ' ' The cashier is not an insurer of the honesty 
and fidelity of those who occupy subordinate positions 
in the bank ; and while it is his duty to supervise and 
control the affairs of the bank and its officers under him 
in the discharge of their duties, he is required only to 
exercise that diligence in regard to the action of his 
subordinates consistent with the discharge of all his 
duties in connection with the bank, exercising that care 
and skill that is reasonable and practicable. He is not 
required to examine by actual inspection every original 
entry made by those under him, but his care extends to 

Harrington v. Bank of Washington, 14 Sergt. & R., 405. 
2 Batchelor v. Planters' Nat'l Bank of Louisville, 78 Ky., 435. 



158 PRATTS' MANUAL OF BANKING LAW. 

a general supervision of the books and affairs of the 
bank ; and when it is shown that he has exercised such 
diligence as a prudent man would in the control of those 
under him and in the supervision of their work, he has 
discharged his duty." 

The want of diligence on the part of the directors 
will not constitute a defense for a neglect of the cashier 
to exercise a proper supervision over a subordinate offi- 
cer ; and if he has himself been negligent, he and his 
sureties will be liable for the loss to the bank, though 
the directors might have discovered the fraud or defal- 
cation of the subordinate, had they exercised reasonable 
diligence. 1 

When Liable for Permitting Overdrafts. — It is 

sometimes said that a cashier will be personally respon- 
sible whenever he allows customers to overdraw their 
accounts, and that even the fact that this is done with 
the sanction of the board of directors will not relieve 
the cashier or his sureties from liability for loss sustained 
by the bank by reason of such overdrafts. 2 The case 
of Minor v. Mechanics' Bank, decided by the United 
States Supreme Court in 1828, is cited as an authority 
for this view of the law, and the broad language used 
by Justice Story in that case does appear to go to that 
length. 3 But what was said by the court on that occa- 
sion must be taken, like all judicial utterances, with 
reference to the facts before the court. To say that a 
cashier is personally liable in all cases where he permits 

x Batchelor v. Planters' Nat'l Bank of Louisville, 78 Ky., 435. 
2 Market Street Bank v. Stumpe, 2 Mo. App., 540 ; Bank of St. 
Mary's v. Calder, 4 Strobhart (S. C), 403. 
3 1 Peters, 46. 



The cashier. 159 

an overdraft is stating the law too broadly. His liabil- 
ity would appear to depend upon the circumstances of 
each case, and whether, from all the facts of the case, 
his action has been prudent, when regarded in the 
light of the common practice of banks in this respect. 1 

When Not Liable for Failure to Comply "With 

By-Laws. — A cashier in the performance of his duties 
is; of course, bound to comply with the by-laws and 
other regulations established by the directors for the 
management of the affairs of the bank, and ordinarily 
he will be liable for an}?- loss resulting to the bank from 
his failure to do so. But it will sometimes happen that 
such compliance is impracticable or, indeed, impossible. 
Thus, for instance, the by-laws may require him to con- 
sult other officers or certain committees before taking 
action in designated matters ; but this he may be unable 
to do by reason of the absence of such other officer, or 
by reason of the failure of such committees to meet, 
and in such case clearly he ought not be held liable for 
failing to conform to the regulation, when he has other- 
wise acted in the business with due vigilance and pru- 
dence. 2 On this head it has been said by the Court of 
Appeals of New York : ' ' To impose upon the cashier 
the duty of carrying on the business of a bank, and yet 
hold him responsible for a neglect of duty in not con- 
sulting officers and committees who apparently held no 
meetings and systematically absented themselves from 
the performance of their duties, is an imposition which 
the law will not tolerate. It would be quite impracti- 
cable for the managing officer of a bank required to 

1 Commercial Bank v. Ten Eyck, 48 N. Y., 305. See page 43. 

2 Second Nat'l Bank v. Burt, 93 N. Y., 233. 



l6o PRATTS' MANUAL OF BANKING LAW. 

keep it open daily to leave his place of business as each 
transaction requiring attention occurred to look up per- 
sons engaged in other employments and consult them 
in regard to such transactions. ' ' * 

Sanction of Directors Will Not Excuse Viola- 
tion of Duty. — Any violation of the duties of his office 
by the cashier will not be excused by the fact that it was 
done with the sanction of the board of directors. In the 
important case of Minor v. Mechanics' Bank the defend- 
ant sought to set up as a defense that the practice of 
allowing certain persons to overdraw their accounts 
(which was one of the grounds of the alleged neglect 
of the cashier) was known to the president and directors, 
and was expressly or tacitly acquiesced in and approved 
by them. But it was held that the defense was not good. 
And in the course of that part of the opinion devoted 
to this question the court said: "It [the instruction 
prayed for] supposes that the usage and practice of the 
cashier, under the sanction of the board, would justify a 
known misapplication of the funds of the bank. What 
is that usage and practice as put in the case ? It is a 
usage to allow customers to overdraw, and to have their 
checks and notes charged up, without present funds in 
the bank. Stripped of all technical disguise, the usage 
and practice thus attempted to be sanctioned is a usage 
and practice to misapply the funds of the bank, and to 
connive at the withdrawal of the same, without any 
security in favor of certain privileged persons. Such a 
usage and practice is surely a manifest departure from 
the duty both of the directors and the cashier as can- 
not receive any countenance in a court of justice. It 

Second Nat'l Bank v. Burt, 93 N. Y., 233. 



BONDS OF OFFICERS. l6l 

could not be supported by a vote of the directors, how- 
ever formal; and, therefore, whenever done by the cashier, 
is at his own peril and upon the responsibility of himself 
and his sureties. ' ' l 

But although the fact that it is done with the assent 
of a superior officer will not excuse the cashier for an 
improper or wrongful act, yet if the circumstances are 
such that he, exercising reasonable vigilance, would not 
suspect but that the transaction was right and proper, 
he will not be held personally liable. 2 



CHAPTER III. 



BONDS OF OFFICERS. 

It is the uniform practice of banks to require bonds 
of their cashiers, and in most instances bonds are also 
required from the subordinate officers. In this chapter 
it is proposed to state briefly some of the rules by which 
such obligations are governed, and to point out how the 
undertakings of sureties in such cases are construed. 

The Scope of the Undertaking. — In Allison v. 
Farmers' Bank 3 the Court of Appeals of Virginia held 
that the surety in a bond conditioned for the faithful 
performance by the principal therein of the duties of 
book-keeper of the bank was not liable for money taken 
by him from the teller's drawer, the majority of the 
court being of the opinion that the surety, when he 

1 1 Peters, 46. 

2 Commercial Bank v. Ten Eyck, 48 N. Y., 305. 

3 6 Randolph, 204. 

II 



1 62 PRATTS' MANUAI, OF BANKING UW. 

signed the bond, did not intend to bind himself that his 
principal would not commit a felony. But the doctrine 
of this case is not now regarded as sound. In Roches- 
ter City Bank v. Elwood 1 Wright, J., observed: "If 
the principles upon which this case was decided are to 
be imported into our law, I see not why every teller 
may not make false entries and every book-keeper ab- 
stract funds at pleasure by transcending the limits of 
the trust reposed. The doctrines put forth in the major- 
ity opinions would substantially cancel all official bonds 
for the safe-keeping of corporate or public funds. ' ' The 
proper construction of such an engagement appears to 
be that it guaranties that the person is honest and is a 
suitable person to be introduced into the bank as an 
employe thereof, and that if he avails himself of his 
position in the bank to abstract its funds his sureties 
will be liable. 2 

In Rochester City Bank v. Klwood the bond was con- 
ditioned that the principal obligor, one Gold, should faith- 
fully discharge ' ' the trust reposed in him as assistant 
book-keeper; ' ' and the question was whether the embez- 
zling of the funds of the bank by him, under cover of false 
entries in the books, was a breach of the bond for which 
the surety was liable. The bank was nonsuited in the 
court below on the ground that the bond did not cover 
such an embezzlement. But this j udgment was reversed 
in the Court of Appeals. Wright, J., delivering the 
opinion, said: "I agree that the surety cannot be 
holden beyond the fair scope of his engagement, as in- 
tended by the parties, when undertaken ; but the ques- 

x 2i N. Y., 88. 

2 German American Bank v. Auth, 87 Penn. St., 419 ; Roches- 
ter City Bank v. Elwood, 21 N. Y., 88; 



BONDS OF OFFICERS. 1 63 

tion is, What was this intention, as expressed in the 
instrument, construed in the light of the circumstances 
surrounding its execution ? Gold had been elected for 
a post in a banking institution which brought him into 
close and constant proximity with its money and prop- 
erty. His place was behind the counter of the insti- 
tution, and practically he had nearly the opportunity 
of the cashier or teller to embezzle the funds of the 
corporation, and a better one to conceal such embezzle- 
ment arid prevent its immediate detection. The receiv- 
ing and paying out of the money of the bank was done 
by the cashier or teller, but it was not their duty to 
keep constant and exclusive watch over it. The tempta- 
tion to purloin money constantly besets those employes 
of a bank who are directly within reach of it. These 
things are presumed to have been known to the parties, 
and under the circumstances the defendant Elwood 
guaranties that the appointee shall faithfully discharge 
a trust, as one of its employes, reposed in him by the 
bank. Now, can it fairly be said that the parties only 
contemplated and Elwood only intended a guaranty 
that Gold should keep the books of the bank correctly, 
and if a loss ensued from a default in this respect he 
would respond to the extent of such loss? I think 
not. * * * it seems to me that to carry out the 
intent of the parties the instrument should be construed 
as an absolute engagement of the defendant for the in- 
tegrity and fidelity of his principal in the discharge of 
the trust reposed in him as an assistant book-keeper in 
the bank. The contract did not define the trust re- 
posed, but indicated the department of duty to be 
assigned, and guarantied that the appointee was a 
trustworthy person to be introduced into the bank to 



164 PRATTS' MANUAL OF BANKING LAW. 

discharge that duty. Its obvious intention was to vouch 
for his honesty and fidelity to his trust as an employe 
of the bank. ' ' 

Surety Released if Duties of Officer Are 
Changed. — If a surety has undertaken for the faithful 
conduct of a person in a particular office of the bank, 
a substantial change in the duties of the office will oper- 
ate to discharge the surety, for this would be a variance 
from the obligation which he has assumed. Accord- 
ingly, it has been held that the surety upon the bond of a 
book-keeper was released because his principal had been 
assigned to perform additional duties as teller. 1 So, in a 
Canadian case, it was held that a surety for the per- 
formance of the duties of bank agent could not be made 
responsible for losses accruing after the agent had been 
appointed cashier, because the nature of the agency had 
been changed and the responsibilities were different, 
though really not so onerous as before. 2 

But the surety will not be discharged merely because 
new duties are assigned to the officer, if such duties are 
fairly within the scope of the office. Where a surety 
had undertaken that his principal would faithfully dis- 
charge "the trust reposed in him as assistant book- 
keeper, ' ' it was held that false entries made by the prin- 
cipal in the credit journal constituted a breach of the 
bond, though at the time the bond was given this book 
was kept by the teller. 3 The court, by Wright, J., 
observed : ' ' Conceding that the surety covenanted that 
Gold should do his duty as an assistant book-keeper 

'Home Savings Bank v. Traube, 6 Mo. App., 221. 

2 Bank of Upper Canada v. Covert, 5 Upper Canada Q. B., 541. 

3 Rochester City Bank v. Blwood, 21 N. Y., 88. 



BONDS OF OFFICERS. 1 65 

merely, making entries in the credit journal was book- 
keeping, and was within the range of the class of duties 
that might be appropriately assigned to an assistant book- 
keeper. The teller, it is true, kept this book for some 
months after Gold went into the bank, and, in doing so, 
it might be appropriately said that he was acting as 
assistant book-keeper. We are not informed what books 
were assigned to Gold to keep when he entered the 
bank ; but is not the idea an absurd one, that the man- 
agers of the bank could not assign to him the keeping 
of another book without releasing the surety from his 
obligation ? " 

Whether Sureties Released by Increase of Capi- 
tal. — Whether the increase of the capital of a bank 
will discharge the sureties on the bond of a cashier or 
other officer will depend upon the nature of the under- 
taking and the circumstances of the particular case. 
Naturally, the presumption must be that it is within 
the contemplation of the parties that the bank will en- 
large its business by all lawful ways and means not go- 
ing beyond a banking business ; and if the law in ex- 
istence at the time the bond is made authorizes the in- 
creasing of the capital stock, an increase made in pur- 
suance of such authority must be presumed to be within 
the condition of a bond where the terms are broad 
enough to include it in fair and reasonable intendment. 1 

1 Lionberger v. Krieger, 88 Mo., 160. The condition of the 
bond in this case was as follows : ' ' Now, if the said J. Philip 
Krieger, jr., shall well and truly and faithfully perform the duties 
of cashier of said bank for and during all the time he shall hold 
such office of cashier of said bank, and for and during all the 
time he may continue to act as such cashier of said bank, whether 
under the present appointment or under future reappointments, 



1 66 PRAMS' MANUAL Otf BANKING I,AW. 

In a case in Delaware where the sureties of a cashier 
contended that they were discharged by an increase in 
the capital stock of the bank it was said by the court : 
' ' The simple answer to the proposition is that there was 
no enlargement of the duties of the officer. The sphere 
of his duties was the same, although the subject-mat- 
ter of his charge might be increased, which is no more 
than what happens from day to day from the fluctuation 
in the amount of the deposits. ' ' l 

Sureties Not Released by Neglect or Conniv- 
ance of Superior Officers of Principal. — The sure- 
ties are not relieved from liability by the failure of the 
directors or managing officers to exercise a suitable 

and shall well, truly, and faithfully account for and render over 
to said bank all such money," etc., "and shall, while he con- 
tinues in such service either under the present appointment or 
any future reappointment, faithfully and to the best of his ability 
perform all trusts reposed in him, and all duties devolved on him 
by the law of the land or by any by-law, rule, order, or resolution 
of said board now existing or hereafter made, enacted, or adopted 
not inconsistent with the laws of the land, then," etc. This is a 
very good form for a cashier's bond, and may be safely adopted 
as a precedent. 

1 Bank of Wilmington and Brandywine v. Wollaston, 3 Har- 
rington, 90. But see Grocers' Bank v. Kingman, 16 Gray, 473. 
In the latter case it was held that sureties who had undertaken 
to save the bank harmless from every loss that might arise from 
the cashier's mistakes, as well as losses arising from his fraud, 
were discharged by an increase of the capital from $300,000 to 
$750,000. Possibly this case is susceptible of being distinguished 
from the cases which sustain the doctrine stated in the text ; but, 
nevertheless, it is submitted that the principle of construction 
adopted in that case is much stricter than those which in the 
more recent authorities have been applied to the undertakings of 
guarantors. 



BONDS OF OFFICERS. 167 

supervision over the affairs of the bank, and to properly 
inspect the work of the officer or employe who is the 
principal in the bond. 1 A surety for a teller set up as 
a defense that before and at the time he signed the bond 
the bank had in force a by-law which required that the 
cashier should carefully observe the conduct of all offi- 
cers employed under him ; that he should daily exam- 
ine the settlements of the cash accounts of the bank and 
take charge of the same, and whenever the actual ac- 
count should materially disagree with the balance of the 
cash account he should report the same to the president 
and directors without delay ; and that it was his duty 
to ascertain by personal examination how the account 
stood. It was alleged, also, that there was another by- 
law in force which provided that a committee of three 
directors should be appointed, whose duty it should be, 
among other things, to suddenly and without previous 
notice count the teller's cash-book at least once in each 
month, and in the same manner to count all the cash of 
the bank at least twice in each year, without notice, and 
with as much variation in time as would be most likely 
to frustrate any attempt to conceal any abstraction of 
funds that might have been made. The surety further 
alleged that he was induced to become security on the 
bond of the teller because he knew of the existence of 
these by-laws and requirements, and with the confident 
expectation that they would be enforced, but that the 
directors and officers had wholly failed to carry them 
into effect. But it was held that this neglect on the 

1 Chew v. Ellingwood, §6 Mo. , 260 ; State, to use of Southern 
Bank, v. Atherton, 40 Mo., 209 ; Amherst Bank v. Root, 2 Mete., 
522 ; Morris Canal and Banking Company v. Van Vorst, 1 Zabris- 
kie (N.J.), 100. 



1 68 PRATTS* MANUAL OP BANKING LAW. 

part of the teller's superiors was no ground of defense 
for his sureties. The court said : ' ' We cannot accede 
to the first proposition of the counsel for the defendant, 
that he is exonerated by reason of the negligence of the 
cashier and directors of the bank in failing to make fre- 
quent examinations of the affairs of the bank, to count 
the money, inspect the books, and generally to watch 
over its concerns. Their duties were perhaps not as 
diligently performed as they ought to have been, but 
the rules and by-laws were simply directory. They 
were intended to prescribe the duties of the cashier and 
directors, and a faithful compliance with them would 
no doubt result indirectly in favor of the sureties by 
tending to an early and speedy disclosure of fraud ; yet 
a failure to comply with them cannot be held as a pre- 
cedent condition to the sureties' liability. The prin- 
ciple contended for would have the effect to deprive a 
corporation of all remedy against one agent on account 
of the negligence or default of another. The cashier 
might excuse himself by pleading the failure of the 
directors to perform their duty, and the directors would 
excuse themselves by showing that the cashier had been 
guilty of neglect and omitted to execute the trust de- 
volved upon him. ' ' * 

Nor will it release the sureties that the acts alleged 
as a breach of the bond were permitted or connived at 
by the directors or managing agents. 2 If their princi- 
pal has been dishonest, it is no excuse that there were 
other unfaithful officers ; and if he has done illegal acts, 
the acquiescence or connivance of his superior officers 



1 State, to use of Southern Bank, v. Atherton, 40 Mo., 209. 
z Minor v. Mechanics' Bank, 1 Peters, 461 ; Chew v. Ellingwood, 
86 Mo., 260 ; Market Street Bank v. Stumpe, 2 Mo. App., 545. 



BONDS OF OFFICERS. 1 69 

affords him or his sureties no protection. But the doing 
of an improper or illegal act at the direction of his su- 
perior, when he has no reason to suppose that the act 
is illegal or improper, will not constitute a breach of an 
officer's bond. 1 

Effect of Laws Requiring Bonds. — Banking laws 
and bank charters frequently require that certain desig- 
nated officers of the bank (as, for instance, cashiers) 
shall give bonds before entering upon the duties of their 
offices, and sometimes the statute or charter prescribes 
the conditions of such a bond. But the effect of such 
a statute is not to render void a bond which is not in 
conformity thereto ; but such bond, though invalid as a 
bond under the statute, will be valid as a common-law 
bond if there is nothing immoral or unlawful in its 
stipulations. 2 

Directors as Sureties. — It is not considered proper 
that a director should be a surety upon the bond of an 
officer of the bank. But where a director does become 
such a surety, neither he nor his co-obligors can set up 
this fact as a matter of defense. 3 In Amherst Bank v. 
Root, where the point was raised that the cashier's bond 
was void as against the policy of the law because three 
of the directors, whose duty it was to examine and ap- 
prove the bond, were sureties thereon, Shaw, C. J., 
said : ' ' This exception certainly comes with a very bad 
grace from those directors who thus became sureties. 
It sets up the dereliction of their duty as directors to 

1 Commercial Bank v. Ten Eyck, 48 N. Y., 305. 

2 Franklin Bank v. Cooper, 36 Me., 179 ; L,ionberger v. Krieger, 
88 Mo., 160. 

3 Amherst Ea::k v. Root, 2 Mete. (Mass.), 522. 



170 PRATES' MANTjAI, OF BANKING UW. 

avoid their obligation as contractors. It may have been 
in very bad taste, it may have been indiscreet and ill- 
judged to put themselves in a situation to express an 
opinion on their own sufficiency as such sureties. But 
whether right or wrong, it is impossible to perceive how 
the obligors, either such directors themselves or their 
co-obligors, can avail themselves of this circumstance 
to avoid their obligation. ' ' 

And it would seem that upon principles of law now 
well settled the director could not set up his disability 
as a defense, even though the statute should, as is the 
case in some States, expressly forbid that a director 
should be such a surety. 



INDEX. 



Page. 
BANK-BOOK, 

effect of writing up 81 

entries in may be impeached by either bank or de- 
positor • . • 81 

duty of depositor to examine 82-84 

when customer estopped to question correctness of 

entries in 84 

examination by clerk or agent 84 

BONDS, 

condition that cashier will "well and truly exe- 
cute the duties of cashier ' ' is undertaking for 
reasonable skill and ability, as well as for hon- 
esty 156 

condition that principal would perform duties to 
best of his ability held undertaking that he would 

exercise competent skill and ability 157 

scope of surety's undertaking 161-164 

surety released if duties of officer changed . ... 164 

but not where the new duties properly belong to 

the office 164 

whether surety released by increase of capital . . 165 

surety not released by neglect or connivance of 

superior officer of principal 166-168 

effect of laws requiring bonds 169 

directors as sureties 169 

(See also Cashier; Officers.) 
CASHIER, 

general powers of 147 

power to indorse and transfer securities 148 

power in this respect not affected by statutory pro- 
visions 148-150 

171 



172 INt>£X. 

Page. 
CASHIER— Continued. 

can transfer only negotiable securities and in ordi- 
nary course of business 150 

indorsement or signature of as "cashier" .... 151 

power to certify checks 152 

power of not affected by authority of teller to cer- 
tify 152 

power to borrow money for bank 153 

restriction of his customary powers does not affect 

third persons without notice 153 

cannot make discounts 154 

liable if he transcends known powers of his office 

without authority . 154 

may be clothed with greater powers 155 

express authority from directors not necessary . . 155 

must exercise reasonable care and skill 156 

undertaking that he will discharge duties to best 
of his ability is undertaking for competent skill 

and ability 157 

when liable for neglect of subordinate 157 

when liable for permitting overdrafts 158 

want of diligence on part of directors no excuse 

for neglect to supervise work of subordinate . . 158 

when not liable for non-compliance with by-laws . 159 

sanction of directors no excuse for violation of duty 160 

when excused for wrongful act done at direction of 

superior 161 

neglect of to supervise work of teller does not re- 
lease surety on latter' s bond 167 

(See also OFFICERS.) 

CERTIFICATION, 

of bills and notes 50 

of checks 65-80 

(See also Checks.) 

CHECKS, 

time within which bank must pay 32 

liable for damages to depositor if it fails to pay . . 33-37 

payment of canceled checks . .• 37 



INDKX. I73 

Page. 

CHECKS— Continued. 

payment of stale checks „ 37 

payment of checks not due . 37 

cashing checks drawn on other banks 39 

payments made on forged cannot be charged to 

depositor 51 

but where depositor has been guilty of neglect he 

must bear loss 53 

bank must ascertain genuineness of payee's in- 
dorsement 56 

when amount for which check was originally drawn 

may be charged against depositor 56 

bank cannot recover money paid on forged signa- 
ture 57 

but if bank has been misled by party to whom 

payment was made, it may recover 58 

bank may recover if alteration is in body of . . . 62 
time within which bank must give notice of forg- 
ery of 63 

obligation assumed by certification of 65 

effect of certifying 65 

what officer may certify 67 

officer cannot certify his own check 69 

officers have no implied authority to certify unless 

bank has funds of drawer 70 

bank may recover money paid on check raised after 

certification 71 

certified check not outlawed by delay in present- 
ing 71 

when bank may recall certification made by mis- 
take 70 

verbal acceptances of 72 

may be accepted, though not in existence .... 73 

promise to accept may be verbal 73 

certification of forged and altered checks .... 74-78 
showing meaning of contract of certification by 

custom and usage 78 

assurance of officer that check is genuine in all 

particulars not binding on bank 79 



174 INDEX. 

Page. 
CHECKS— Continued. 

effect of clearing-house rule that checks not good 

are to be returned before certain hour 87-91 

time in which check deposited for collection must 

be presented 97 

bank undertaking to collect not excused for neg- 
lect to present by fact that drawer has no funds 
on deposit 97 

bank making collection of should not procure cer- 
tification 98 

collecting bank should not send certified check to 

certifying bank 101 

(See also Deposits; Payment.) 

CLEARING-HOUSE, 

general course of business in 85 

rules of do not affect third parties 86 

construction of rule of that checks not good are to 

be returned before certain hour 87-91 

whether sending instrument through is demand of 

payment 91 

bank not conforming to rules of cannot avail itself 

of them 92 

no sanctity attached to * • . .. 93 

COLLECTIONS, 

degree of care and skill required in making ... 93 

bank making regarded as agent for pay 94 

duties as to presentment of paper left for .... 94-96 
to whom notice of dishonor must be given . ... 96 
time in which check deposited for must be pre- 
sented 97 

fact that drawer has no funds on deposit does not 

excuse failure to present check deposited for . . 97 

check deposited for should not be presented for 

certification 98 

bank must do all holder would ... ^ .... . 98 

whether paper should be sent direct to bank which 

is to make payment . . . 100 



INDKX. I75 

Page. 
COLLECTIONS— Continued. 

certified check should not be sent to certifying 

bank 101 

duty of bank to inquire after paper not heard from . 101 

must communicate to correspondent instructions 

of holder 103 

measure of damages where bank fails to perform 

its duty 103 

only money to be received in payment 103 

insolvency of bank revokes authority to enter gen- 
eral credit for avails 104 

duty where check is received in payment .... 105 

when bauk liable for mistake of law 108 

whether collecting bank liable for neglect or de- 
fault of correspondent 108-113 

liability where correspondent fails to pay over pro- 
ceeds = . 113 

when bank to which paper is sent is agent to re- 
ceive proceeds 114 

whether collecting bank is liable for neglect of 

notary " " 115-117 

DAMAGES, 

for failure to pay check of depositor 3 2_ 34 

customer may recover, though no actual damage 

shown 34 

measure of where collecting bank fails to perform 

its duty 103 

DEPOSITS, 

different kinds of 1 

nature of general deposit 1 

nature of special deposit 3 

when general and when special 4 

to what officer should be paid in 5 

where should be delivered to bank officer .... 5 

when paper deposited is considered as cash ... 7 

of check on bank itself, when considered as cash . 8 

of checks drawn in favor of bank itself ...... 10 

of instruments not genuine 10 



176 INDEX. 

Page. 
DEPOSITS— Continued. 

custom to give conditional credit for paper depos- 
ited 11 

sometimes made for special purpose 12 

where deposit is made for special purpose depos- 
itor may revoke directions 13 

consideration for agreement of bank to make 

special application of 15 

received by bank as stakeholder 15 

real owner of funds deposited may follow .... 17 

when necessary that bank have notice that deposit 

is impressed with a trust 19 

what will be notice to bank that funds deposited 

are trust funds 20 

custom to receive for safe-keeping 22 

authority of officers to receive for safe-keeping . . 23 

deposits for safe -keeping incidental to banking 

business 23 

degree of care required in keeping special deposits . 24-27 
liability of bank where special deposit is stolen by 

officer 27 

what constitutes gross negligence in such case . . 29 

is fraud to receive when bank is insolvent .... 30 

in Missouri officers personally liable if they receive 

when bank is known to be insolvent 31 

where bank receives when insolvent depositor may 

reclaim 31 

reclamation of in such case not a preference ... 32 

(See also Checks; Payment.) 
DIRECTORS, 

general powers of 131 

term of office 132 

can act only as a board 133 

cannot exclude co-director from access to books 

and records 133 

presumed to know condition of bank 134 

presumption exists only in favor of innocent third 

parties 136 

when bank is charged with knowledge of ... . 138 



INDEX. 177 

Page. 
DIRECTORS— Continued. 

delegation of authority to subordinate agencies . . 138 

degree of care required of 139-142 

must exercise ordinary skill and judgment . . . .142-144 
may commit immediate management to executive 

officers 144 

liability for violation of law 145 

not liable for frauds of co-director 146 

the president of the board 146 

sanction of will not excuse cashier in violation of 

duty 160 

neglect of to supervise work of officer will not re- 
lease surety 167 

as sureties on officer's bond 169 

(See also Officers ) 

FORGERY. (See Checks ; Payment.) 

INSOLVENCY, 

bank receiving deposits when insolvent guilty of 

fraud 30 

depositor may reclaim deposit received by bank 

when insolvent 31 

insolvency of collecting bank revokes authority to 

enter general credit for avails of collections . . 105 

(See also Deposits.) 

LIEN, BANKER'S, 

no lien where deposit is for special purpose ... 15 

nature of 117 

exists only where there is balance due and pay- 
able 118 

and where credit has been given 119 

not favored 119 

intention of parties 120 

does not attach to deposits impressed with a trust . 120 
nor where deposit is not in usual course of busi- 
ness 121 

nor where securities are deposited for a certain debt 

or for debts to a fixed amount 124 

12 



178 INDEX. 

Page. 
LIEN, BANKER'S— Continued. 

equities of third persons :.'...: 126 

form of indorsement may convey notice of equities . 127 

bank not protected against latent equities unless 

securities are negotiable 128 

in some States no lien for pre-existing debt ... 128 

where depositor has several accounts 128 

deposit and debt must be in same right 129 

lost by taking other security 129 

LIMITATIONS, 

when statute of limitations begins to run against 

depositor 36. 

against holder of certified check 72 

OVERDRAFTS, 

whether improper to allow 42-44 

when cashier is liable for allowing 158 

OFFICERS, 

what officers may receive deposits 5 

authority of to receive deposits of for safe-keeping . 23 

liability of bank where special deposit is stolen by . 27 

gambling and speculations of 29 

liability of for receiving deposits when bank is in- 
solvent (note) 31 

when may allow overdrafts 42-44 

what officers may certify checks 67-69 

cannot certify their own checks 69 

have no implied authority to certify checks unless 

bank has funds of drawer 70 

cannot bind bank by assurances that check is gen- 
uine in all particulars 79 

(See also Cashier ; President; Directors.) 

PAYMENT, 

time .within which bank must pay 32 

customer may recover damages for failure of bank 

to pay checks 34> 35 

order of ' 35 



INDEX. 1 79 

Page. 
PAYMENT— Continued. 

where deposit is claimed by different parties ... 39, 40 

of checks on other banks - 40 

bank not required to see to application of trust 

funds 41 

of customer's notes and acceptances 44, 45 

duty of bank holding customer's obligation to 

apply deposit to that purpose 46-50 

on forged and altered orders cannot be charged to 

depositor 51 

but depositor must bear loss if he has been guilty 
of negligence 53 

bank making must ascertain genuineness of pay- 
ee's indorsement 55 

when bank may charge depositor with amount for 

which order originally drawn 56 

on forged signature cannot be recovered 56 

but may be recovered if party to whom made has 

misled bank 58-62 

may be recovered where alteration is in body of 

instrument 62 

time within which bank must give notice that in- 
strument is forged • 63 

made on check raised after certification may be re- 
covered 71 

collecting bank can receive in money only .... 103 

(See also Checks ; Deposits; Collections.) 

PRESIDENT, 

cannot certify his own check 69 

powers of . . . '. 146, 147 

(See also Officers.) 

SPECIAL DEPOSITS. (See Deposits.) 

SURETY. (See Bonds; Cashier; Officers.) 

TRUST FUNDS. (See Deposits.) 






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